Good Debt to Credit Ratio
Your debt to credit ratio is a clear indicator of your overall financial well-being. The calculation is simple but sometimes misunderstood. Your overall debt to credit ratio is found by dividing the total of amount debt by the total of your credit limits for your revolving lines of credit. This might be the most common but it is also done on an account by account basis. This creates percentages for each account and overall percentage.
The debt to credit’s prime use is by creditors examining your overall risk. The lower the utilization the less risk you are for the lender. This is because of the direct correlation between individuals near their limit and a high rate of default.
The influence of your debt to credit ration is also seen in the FICO score calculation. It makes up 30% of your FICO score and has the second largest weight after your payment history. The FICO formula takes into account again your overall debt to credit ratio and the percentage on an account by account basis.
What is a good debt to credit ratio?
This is best answered by looking at those individuals with and excellent credit score. These individuals fall into the excellent credit score range with score between 750 and 850. What you will find is a debt to credit ratio below 30%. This alone will not get you such a high score, but as stated above carries a large weight in the calculation.
How to get a good debt to credit ratio?
It might sound simple but the best way is to pay off your debt. Sometimes you might here answer like apply for a credit line increase or new account, but site like MyFICO will tell you this is not the best way. They state if you don’t need the credit don’t apply for it. This method creates a new credit inquiry that can or cannot hurt your FICO score. So the best idea is to pay off your debt.
The methods you take to get your debt to credit ratio down are many. One of the best is to setup a monthly budget. This will help designate what debts you are paying off and help control your spending. Other methods include: getting a second job, freelancing, and sell stuff.
Conclusion
This is going to take time and discipline on your part. You need to commit to getting out debt to lower your debt to credit ratio. Also, control your spending and don’t add back to your debt. Leave the credit cards at home to control your spending.
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5 Responses to “Good Debt to Credit Ratio”
I believe most people are better off trying to increase their credit limits before paying off the balance. The money saved can be put to better uses and the negative affects of a new credit inquiry are small (and short-lived) compared to the benefits of reducing one’s debt to credit ratio.
Many credit card companies will do a “soft pull” if asked. In this case, the company makes a decision based upon the account history itself. I’ve personally had a credit limit doubled without having my credit report checked at all.
So always try that first.
April 22nd, 2011
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