What is Your Debt to Credit Ratio (And Why Should You Care)

Understanding your debt to credit ratio can help you increase your credit score and qualify for better interest rates and loan terms.

One of the primary factors that affect your credit score is your debt to credit ratio.  Also known as your credit utilization ratio, this number compares your credit card balance to the amount of credit available to you.  Lenders will look at your ratio to determine how risky it is to loan you money (the higher the percentage of available credit you are using the riskier you are to them).  It also makes up about a third of your credit score, so unless you want your score sinking to the bottom of the ocean you’d better watch your debt to credit ratio carefully.

How is Debt to Credit Ratio Calculated?

Simple.  All you need is your current credit card balances and the limit on each card.  For each card, divide the current balance by the card’s limit and then multiply by 100.

For example, say you have a MasterCard with a $10,000 limit and your current balance is $3,000.

($3,000 / $10,000) X 100 = 30

In other words you are utilizing 30 percent of the credit available to you.  You want to keep that number as low as possible.  Most experts advise to keep it under 35% but if you can get it lower that’s even better.   If your debt to credit ratio is already sky-high it’s time to stop charging and start paying down that debt until you get it down to a healthier level.  This is especially true if you plan on taking out a new loan anytime in the near future.

Lenders will look at your debt to credit ratio for each of your credit cards individually as well as your overall ratio for all cards combined, so you’ll want to run this simple calculation for each of them to see how you stack up.   And remember since credit utilization makes up 30% of your credit score, improving it is one of the most powerful ways to raise your credit score.

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Mike is a freelance writer and blogger who specializes in finance and parenting topics. He is a dedicated husband and father of three who is obsessed with creating multiple streams of income and building wealth so he can achieve true financial freedom for his family. Like what you're reading? Subscribe to our free RSS feed and follow us on Twitter.

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  1. James says

    Just recently we joined the ranks of minivan owners. Normally, we like to pay cash (or at least a large percentage in cash) when we buy a car. This time the interest rates for financing a car were so low we considered it. We checked our credit score before hand to see if we would qualify for the 2.75% rate. We did not; our credit to debt ratio was too high. The few cards that we have were close to their limit. We had taken advantage of the 0% finance for twelve month offers. We still have a few more months before interest starts accruing but we thought it would be better to pay them off now, increase our credit score, and finance the car. It worked. Paying those off increased our score by 60 points. Plus, the interest rate on the car loan is lower than that of the credit cards.

  2. QL says

    The basic criteria to observe the well-being of your finance is going through your debit to credit ratio. If you simply divide the total amount of debt with total of your credit limits you’ll going to get the overall debit to credit ratio.

  3. says

    The other thing a lot of people don’t consider is that if you have 4 or 5 open credit cards with no balance, you would think that is a positive in terms of credit/debt ratio, but many lenders frown upon having that many open, unused credit card accounts. Generally only having a few credit card accounts total is a best practice. If you can have one with a zero balance, that’s likely a good way to go as well. Too many higher limit cards with no balance can scare creditors away because of the potential for you to rack up a lot of debt quickly.

  4. says

    Mike @ Credit Flare, I agree with your comment. Also, Mike Collins, great article here. It’s important that consumers understand the vital factors that go into a great credit score. That said, a good debt to credit ratio is a great place to start. Thanks for the great read!

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