Problems with a High Debt Ratio

The biggest problem with a high debt ratio is the effect it has on your credit score and your creditworthiness. Because your credit score is used as an indicator of your level of financial responsibility, having a lot of debt relative to the amount of credit available to you can impact your ability to obtain new loans or credit, rent a home or even get a new job. It's important to pay down your debt so your credit score is as high as possible.

Credit Score

The ratio of your debt to your available credit is called "credit utilization," and it is one of the key factors in determining your credit score. When you have a high ratio of debt to available credit, it weighs heavily on your score, because it demonstrates to creditors you're a high credit risk. You should carry a balance of no more than 25 to 30 percent of your credit limit to keep your credit score high, according to the Better Business Bureau website. Paying off your credit card each month is a way to help earn a high credit score.

Borrowing Money

Each time you submit an application for a loan or a credit card, the lender looks at your credit score, among other things, to help predict whether you will make the payments to repay the loan. This is known as your level of credit risk. When you have a high credit utilization ratio, lenders may be reluctant to lend you money, because it appears you're having difficulty handling the debt you already own. It's important to lower your credit utilization ratio if you intend to borrow money. Otherwise, lenders will continue to view you as an irresponsible borrower.

Renting/Job Hunting

A high utilization ratio may also cause problems when you're trying to rent a home or find a job. In addition to lenders, landlords and prospective employers may look into your credit report to determine how responsible you are. Employers must ask your permission before looking into your credit report. Some landlords won't look into your credit report; however, some landlords or larger developments or rental agencies often will. You may benefit from asking previous landlords for letters of support, stating that you have been responsible with your rent payments in the past.

Considerations

Lowering your credit utilization ratio requires budgeting and a payment plan. According to the Liberty Mutual website, you can calculate your monthly budget by tracking your spending for a week and multiplying it by 4.3, then adding your regular monthly payments, such as rent, utilities and cell phone. Compare this with your monthly income, and find places to cut back so you can pay off more debt. Pick a payment plan and stick to it. In an August 2009 article on his website, Dave Ramsey recommends paying off the debt with the lowest balance first to motivate yourself to continue paying off debt. He reports in the same article that others recommend paying off the debt with the highest interest rate first, to avoid continuing to pay costly interest.