Revolving Credit-to-Debt Ratio

Save
A high credit-to-debt ratio lowers your credit score.
A high credit-to-debt ratio lowers your credit score. (Image: XiXinXing/XiXinXing/Getty Images)

Revolving credit accounts are usually credit card accounts, although they include arrangements like home equity lines of credit. You charge what you need and make monthly payments on the outstanding balance. Revolving accounts have credit limits. The credit-to-debt or credit-utilization ratio is the percentage of the credit limit you’ve charged.

Calculating Credit-to-Debt Ratio

A credit-utilization or credit-to-debt ratio is computed by dividing the sum of the balances on all your credit cards by the sum of all the card limits. Suppose you have two credit cards. One has a balance of $750 and a limit of $1,500. You owe $850 and have a limit of $2,500 on the other. The aggregate balance is $1,600 and the aggregate limit is $4,000. Your credit utilization ratio equals 40 percent.

Credit Utilization and Credit Rating

In the FICO credit score used by major credit-reporting agencies, your credit-utilization ratio affects the 30 percent of the score that evaluates total debt. Charge too much and you lower your credit score. A good rule of thumb is to keep your aggregate credit card balances to less than 30 percent of the total credit available. If your aggregate balances are too high, paying down credit card debt is a fast way to improve a credit score. Be wary of closing credit card accounts because reducing available credit increases the credit-utilization ratio.

Related Searches

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!