The debt ratio is the difference between the amount of debt you have charged versus the amount of money the credit card has authorized for you to use, or your credit limit. The difference is your debt ratio. This can also be referred to as revolving (credit card) credit you have available. If your credit limit is 5,000 dollars and you have charged 2,500 on the card, your debt ratio is 50%
Debt ratio accounts for 30% of your FICO score, which makes it the second highest factor the credit agencies take into account when looking at your credit.
Maintaining your debt ratio can make an impact on your credit score, but unlike payment history, not everyone knows how to ensure their debt ratio is a positive force on your credit score. Here are a few tips for you to make sure your debt ratio is not a drain on your credit score:
MAINTAIN YOUR TOTAL CREDIT.
Don’t ever close credit cards if you can avoid it. The more cards you have open, the higher your total of available credit. Credit calculating software takes your TOTAL available credit versus TOTAL debt into account. Closing a credit card will decrease your overall available credit without decreasing your debt.
Keep your debt even across your credit cards. It is better to have 4 credit cards with 20% debt ratio, then 1 card with 80% ratio and 3 cards with no debt.
KNOW YOUR LIMITS
Keep the balances on your credit cards as low as possible. Aim to keep all of your balances below 50% of the credit limit on that card.
The FICO software ranks your credit debt based on levels. If your credit card debt is more than 75% of your credit limit, it will cause serious damage to your credit score. The next limit begins at 50%, then 25%.
If your debt is high and approaching that 75% mark, call your credit card company and request an increase of your credit limit.
CHECK YOUR CREDIT REPORT REGULARLY
Look at your credit report to ensure the credit card companies have accurately reported your credit limit. If they haven’t reported your limits, the FICO software will read all of your cards as maxed out.
Report any errors on your credit report immediately. The sooner errors are remedied, the better.
Maintain communication with your credit card company. Call them if there are suspicious charges on your account or if you need to make adjustments to your payment schedule.
By maintaining your debt ratio, you can ensure your credit score is as high as possible. While a solid debt ratio alone is not the only element involved in the calculation of your FICO score, it is a significant portion.
