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Articles » Low Credit Score Loans | | What Is The Debt To Credit Limit Ratio And What Is The Optimal Percentage For It? |
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The debt to credit limit ratio accounts for 30% of your overall credit score, so it’s an important number to understand and keep on top of. Simply summarized, it means how much of your available credit are you actually using? If you’re maxed out on all your credit cards and just paying monthly minimums, you will have a low credit score. If you use your credit cards only for a few purchases a month and pay them off in full, you will have a high credit score .
The debt to credit limit ratio is calculated using your short-term debt numbers and not long-term debt such as mortgages or personal loans. These are separate entries that do affect your credit score, but not in the same way. Determining whether or not to offer you short-term credit is calculated by factoring in all your short-term debt and determining what percentage of your annual income is being used to pay for it. If this number is over 20%, most short-term lenders and credit card companies will not extend an additional or new credit line to you.
The optimum percentage for your debt to credit ratio is 10%. If you carry 10% or less of your debt each month into the next month, you will have a better FICO credit score . This can be achieved by paying off your credit cards and then keeping the balances low. If you pay them off in full each month, not only will you have a better credit score, but you will also avoid paying expensive interest charges to the credit card companies.
When your debt to credit ratio is determined, it is the total of all your credit card limits that is added up and then turned into a percentage, so paying off the one with the highest limit and getting that limit raised will help your debt to credit ratio. Major credit cards such as MasterCard, Visa, Discover and American Express generally have higher spending limits so paying those down first is probably a good strategy in improving your credit score .
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