Credit Vs. Debt

Though you might consider your monthly credit card bill a form of debt, your creditors don't see things as plainly. In some cases, the amount of credit you have available to you can improve your chances of getting a loan, even if it seems you have a lot of debt.

Definition of Credit

Simply put, credit is money you want from a creditor. For example, if you apply for a credit card with a $3,000 limit, you're seeking $3,000 in credit. Similiarly, if you apply for a car loan for $8,500 in addition to this credit card, you're seeking a total of $11,500 in credit. When you apply for a credit card or any type of loan, you're applying for credit.

Definition of Debt

Debt is similar to credit, but it's the other part of the equation, so to speak -- it's money you owe. Once you obtain a credit card with a $3,000 limit and make a $50 purchase on the card, for example, you are $50 in debt, not including interest. Once you obtain a car loan for $8,500, you are $8,500 in debt, again excluding interest. In other words, you apply for credit and accumulate debt from that credit.

Obtaining New Credit

When you apply for new credit, creditors consider your credit score and your debt-to-income ratio to determine whether or not to lend to you. A debt-to-income ratio of no more than 36 percent increases your chances of obtaining new credit because it gives the creditor a reasonable expectation that you can afford to repay your loan. To calculate your debt-to-income ratio, total your monthly debts, such as student loans, auto loans and credit card payments, and divide the sum by your monthly income.

Closing a Credit Account

Closing a credit account changes your credit score by altering the amount of debt you have relative to the amount of credit available to you. For example, if you pay off your $3,000 credit card and still owe $7,000 on your car loan and $300 on another credit card with a $5,000 limit, you have $7,300 in debt and $7,700 in available credit. Your debt-to-credit ratio in this case is about 95 percent. If you close the credit account you paid off, your available credit lowers to $4,700, making your debt-to-credit ratio over 155 percent. To keep your credit score high and increase your chances of obtaining new credit, keep your debts low relative to your available credit. Aim for a debt-to-credit ratio of no more than 25 percent.