Understanding Debt-to-Credit Ratio and Why It Matters

Have you ever applied for a loan or credit card and been rejected despite having a good credit score? If yes, then it is highly possible that your debt-to-credit ratio was not up to the mark. Debt to credit ratio is an essential factor that determines your creditworthiness and how much credit you can be granted. In this blog post, we’ll take a closer look at what debt to credit ratio is, how to calculate it, and why it matters.

What is Debt-to-Credit Ratio?

Debt-to-credit ratio (also known as credit utilization ratio) is the amount of credit used in relation to the total credit available to an individual. It is one of the essential factors that determine your creditworthiness. Simply put, it is a percentage of how much credit you have used in comparison to the total amount of credit available to you.

How to Calculate Debt-your to-Credit Ratio?

Calculating your debt-to-credit ratio is relatively easy. You need to divide the amount of credit you are using by the total credit available to you. For instance, if you have a credit card with a limit of $10,000 and your balance is $2,000, then your debt-to-credit ratio is 20%. The general rule of thumb is to keep your debt-to-credit ratio below 30%.

Why is Debt-to-Credit Ratio Important?

Debt to credit ratio is an essential factor in determining your creditworthiness. Lenders or creditors use it to evaluate how much credit you can be granted. If your debt-to-credit ratio is high (more than 30%), it signifies that you are using an excessive amount of credit and may lead to potential repayment issues. Higher debt to credit ratio indicates your credit riskiness and can negatively impact your credit score, making you less creditworthy.

Tips to Improve Debt-to-Credit Ratio:

The first and foremost tip to improve your debt-to-credit ratio is to manage your credit usage. Try to keep your usage below 30% of the available credit. Moreover, ensure that you make timely payments, so you don’t end up with unnecessary late fees, penalties, or high-interest rates. Closing credit accounts may not be an ideal solution as it can reduce your total available credit. Instead, try to maintain a balance of credit usage across all your accounts.

Debt to credit ratio is an essential aspect of credit history that needs to be taken seriously. Maintaining a low debt-to-credit ratio can enhance your creditworthiness and make it easier for you to secure loans or credit cards. A high debt-to-credit ratio can adversely affect your credit rating and make it challenging to get credit. Managing your credit usage, paying on time, and keeping credit accounts active can all help improve your debt-to-credit ratio. Always be mindful of your credit usage and make sure you do your best to keep your debt-to-credit ratio in check.

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