If you’re considering purchasing a new home in metro Atlanta and will need a loan, it’s important to make sure you’re aware of your credit score and the factors that comprise it. One of the many important components that make up your credit score is your debt-to-credit ratio, also known as your credit utilization ratio.
A debt-to-credit ratio is simply the amount of outstanding debt you have compared to the amount of credit that has been extended to you. For example, if you have two credit cards, one with a $500 credit line and one with a $1,000 credit line, your total available credit would be $1,500. If you charged a total of $500 worth of debt on one of the credit cards, your total available credit would then be $1,000, making your debt-to-credit ratio 33 percent.
Using this example, it’s very simple to calculate your own credit utilization ration. Simply add up all of the available lines of credit that you’ve been extended, and then add up all of the debt accumulated on those credit lines. Divide your total debt by the total available credit, and you will have your debt-to-credit ratio.
Once you’ve determined your ratio, you will have a better idea of whether or not it is negatively impacting your score. Generally, lenders prefer borrowers whose debt-to-credit ratio is at or below 30 percent. If your ratio is above 30 percent, there is a chance you will get denied for a new line of credit, or you may be charged a higher interest rate.
To learn more information about your debt-to-credit ratio, such as how to improve it, read the full article, “Five Tips for Maintaining an Optimal Debt-to-Credit Ratio” on the Equifax Finance Blog.