How Debt-to-Credit Ratio Affects Your Credit Health

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Understanding the Debt-to-Credit Ratio

Your debt-to-credit ratio, also known as your credit utilization ratio, is the amount of credit you’re using on your credit cards relative to your credit limits at a given time. This ratio is a crucial factor in your credit scores, and lenders often consider it when reviewing your application for a loan or credit card.

At O1ne Mortgage, we understand the importance of managing your debt-to-credit ratio to improve your credit scores and secure favorable credit terms. Call us at 213-732-3074 for any mortgage service needs, and let our experts guide you through the process.

What Is the Debt-to-Credit Ratio?

The debt-to-credit ratio, also referred to as the balance-to-limit ratio or debt-to-limit ratio, contributes to the “amounts owed” category of your FICO® Score, which makes up 30% of the score. This ratio helps lenders determine how well you manage your credit card debt.

A high debt-to-credit ratio could indicate that you’re carrying high balances on your credit cards, potentially only making the minimum required payment. This could increase the risk of defaulting on debt payments, leading to higher interest rates or even denial of new credit. Conversely, a low debt-to-credit ratio suggests responsible debt management, which could improve your scores and make you a safer borrower in the eyes of lenders.

How to Calculate Debt-to-Credit Ratio

Calculating your debt-to-credit ratio is straightforward. For each credit card, divide the balance by the card’s credit limit. Then, add up the balances and credit limits across all your credit cards and perform the same calculation to get your overall ratio.

For example, if you have three credit cards:

• Card A: Balance $2,500, Credit Limit $7,500, Ratio 33.3%
• Card B: Balance $1,000, Credit Limit $2,000, Ratio 50%
• Card C: Balance $2,000, Credit Limit $10,000, Ratio 20%

Total: Balance $5,500, Credit Limit $19,500, Overall Ratio 28.2%

Impact on Your Credit Score

Your debt-to-credit ratio significantly influences your credit score, as it makes up 30% of your FICO® Score. High balances on your credit cards can negatively impact your score. Experts recommend keeping your debt-to-credit ratio below 30%, but the lower the ratio, the better it is for your credit score.

Remember, your debt-to-credit ratio is just one of many factors affecting your credit score. Payment history, length of credit history, types of credit used, and recent credit inquiries also play crucial roles.

Debt-to-Credit vs. Debt-to-Income Ratios

While both ratios indicate how well you’re managing your debt, they do so in different ways. The debt-to-credit ratio shows how well you’re managing your credit card balances, whereas the debt-to-income ratio assesses how much of your income goes toward debt payments, including both revolving and installment credit.

For instance, if your gross monthly income is $5,000 and your total debt payments are $2,000, your debt-to-income ratio is 40%. A high debt-to-income ratio could signal that you’re overleveraged and may struggle to afford another payment. However, only your debt-to-credit ratio impacts your credit score, as your income isn’t included in the score calculation.

The Bottom Line

Your debt-to-credit ratio is a vital indicator of your credit health, especially in managing your credit cards. A high ratio could harm your credit score and your chances of obtaining favorable credit terms. Review your credit report to understand your debt-to-credit ratio and take steps to reduce it if necessary.

At O1ne Mortgage, we’re here to help you manage your credit and secure the best mortgage terms. Call us at 213-732-3074 for expert advice and assistance with all your mortgage needs.

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