Everyone who has a credit card has a debt-to-limit ratio. It is a measure of your total available credit against how much credit is being used. This ratio is used as part of your credit score calculation. The more debt you have as compared to your available credit, the higher your debt-to-limit ratio.
Calculating Debt-to-Limit Ratio
The debt-to-limit ratio is calculated by dividing your total outstanding debt by the total amount of credit available to you. For instance, if you have one credit card with a $10,000 available line of credit and owe $2,500 on that card, your debt-to-limit ratio is 25 percent.
Effect on Credit Score
You debt-to-limit ratio could affect your credit score by as much as 30 percent, with your credit payment history being the only item having a greater effect.
Improving Debt-to-Limit Ratio
If you have a good credit score, you can improve your debt-to-limit ratio by getting another credit card and not using it. This increases your available credit but does not increase your actual debt. Therefore, your debt-to-limit ratio will be lower. Another way to improve the ratio is by paying down your debt. However, if you pay off a credit card, do not close the account. Simply do not use it. This decreases your ratio as described above.
Importance of Debt-to-Limit Ratio
Because of the relatively large effect the debt-to-limit ratio has on a credit score, the number is important. With a debt-to-limit ratio of 38 percent or more, you are unlikely to be able to get a loan. Even a ratio of 20 percent or more could make borrowing difficult.
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