The Right Credit Card to Debt Ratio

Your credit score is an important tool for your financial endeavors. A high credit score helps you obtain a mortgage or other loan at favorable interest rates. Credit card companies consider your credit score when deciding your interest rate and credit limit. One of the factors used to determine a credit score is your debt-to-credit ratio, which is the amount of debt you carry relative to your credit limit.

The Magic Number

According to MSN Money, you should aim to keep your debt levels to no more than 30 percent of your available credit to improve your credit score and be attractive to lenders. Anything lower than that number would help even more. About 30 percent of your credit score is determined by how much you owe, and the lower your debt-to-credit ratio is, the more it boosts your score.

Calculating

Calculating your debt-to-credit ratio is simple. Tally all of the credit available to you on your credit cards, and add up all your credit card debt balances. Divide your debts by your available credit to get your debt-to-credit ratio. For example, if your available credit (or credit limit) is $20,000 and you owe $10,000, your debt-to-credit ratio is 50 percent. Because it is recommended that your debt-to-credit ratio be 30 percent or lower, aim to get your debts down to no more than $6,000 if your credit limit is $20,000.

Importance

Because your debt level accounts for almost one-third of your score, a high debt-to-credit ratio will bring your score down. If you are carrying too much debt, lenders may be less willing to loan you money, because you have other debt obligations with little room to borrow additional money to pay them off. Lenders will question whether you will be able to repay any new loans. To compensate for that risk, lenders may charge you a high interest rate.

Bring it Down

If you need help to bring down your debt levels, create a budget. Note your sources of income and how much money you make. Compare that to your expenses. Cut back on expenses so income exceeds expenses. Use that "profit" to pay down your debt so your debt-to-credit ratio is less than 30 percent. The Consumerism Commentary website recommends reducing your debt by using either the snowball or avalanche method. The snowball methods starts by paying off your smallest debt balance, then moving on to the next smallest balance. The avalanche method starts by paying off the debt with the highest interest rate, then moving on to the debt with the next highest interest rate.