Debt to Credit Ratio

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Do you ever find it difficult to pay debts, whether it’s a mortgage, credit card or student loan debts? Or, maybe you do not buy anything or spend much money, but the debt is still piling up? You may experience the simple financial equation called low debt to credit ratio. This ratio is often ignored by credit card users who think that credit card limit is the most important reference. However, they are wrong.

Credit card limit is different from the debt to credit ratio. Which is more dangerous? Apparently the ratio is more dangerous. The following will explain more information about both counts.

What is Actually Debt to Credit Ratio and How to Calculate It?

How to calculate such ratio is actually easy. You just divide credit card balance with the limit. Well, the result will be a debt to credit ratio. For example, suppose for a month you have spent as much as $480, while your limit of $3000, then $480 : $3000=16%. It applies to one personal credit card. However, what if you have multiple credit cards?

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How to calculate it is almost similar. First, you have to calculate the total amount of expenses from each of your credit cards, so if you have two credit cards with expenses of $200 and $150 each, then the total is $400. The results are then shared by the total amount of the limit of the entire credit card. Suppose credit card A has a limit of $800 while credit card B has a limit of $1200. Then, just divide $400 with the total of $800+$1200 = $2000. $400:$2000 = 20%. That’s the result of the debt to credit ratio for more than one credit card.

What’s the Use of Such Ratio?

This ratio is useful for calculating the health of your credit score. It is common knowledge if the credit score consists of various variables, one of which is the debt to credit ratio. The higher your ratio, then your credit score can decrease rapidly. This is often used as a guide for the credit card company to calculate credit card limit.

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The optimal amount for healthy credit score is that your debt to credit ratio should stay below 30%. This does not mean you cannot use credit card after 30%, but you should reduce or even avoid using it for the sake of healthier credit score. Then, what is a credit score and why does it become so important that we must take care and pay attention really? Well, credit score is what determines the future of your loan. The lower credit score, the more credibility you will be questioned by various parties, ranging from mortgage lenders, credit card companies, even banks though.

Actually, without the need to calculate the ratio, you should know better that unnecessary spending is not good for your financial stability. When you apply for credit card, you should be able to think about any long-term impact on what you spend. Set your debt to credit ratio as reference in saving and spending for a better credit score.