What Is Your Debt-to-Credit Ratio, and Why Does It Matter?

What Is Your Debt-to-Credit Ratio, and Why Does It Matter?

Your debt-to-credit ratio, which is also sometimes called your credit utilization rate, is a major component of your credit score. Unfortunately, it is also largely misunderstood. Knowing what your debt-to-credit ratio is and how to manage it will help you get better deals on loans and more. Here is what you need to know.

Debt-to-Credit Ratio 101

Your debt-to-credit ratio is the amount of debt you have relative to the amount of credit you have. Although it can refer to nearly any credit account, the debt-to-credit ratio is really focused on your credit cards. Credit bureaus look at the amount of credit available to you—that is, the limit on each card—and compare it to the amount of debt you have. They do this for each card you have as well as your overall credit and debt amounts. A low debt-to-credit ratio suggests that you have enough money to manage your debt and are unlikely to default, while a high ratio suggests to lenders that you could be spending more than you can manage.

Target Ratio

The lower the ratio, the better, for your credit score. Generally, it is recommended to keep that ratio below 30%. When it creeps up over that, it could begin to hurt your credit score. Keep in mind that this number impacts all of your cards. So, if you have zero balance on one card, but you’ve maxed out the other, your debt-to-credit ratio will be 100% on the maxed out card, which will still negatively impact your credit.

Impacts

Your debt-to-credit ratio accounts for about 30% of your credit score, so it is a significant figure. If you plan to apply for another kind of loan, getting your credit debt under 30% can dramatically improve your credit score and help you save money on your loan.

Mountain Valley Bank is committed to helping customers achieve financial success. Whether you need help with a checking account or a home mortgage in Steamboat Springs, call (970) 870-6550.