Credit to Debt Ratios

Understanding how debt is viewed by creditors and how it affects your credit limits can help you maintain a good credit score. Credit score calculations aren't only affected by whether consumers pay their bills on time. The calculations also weigh consumers' credit card balances against their total available credit.

Significance

The credit utilization ratio can affect how much credit companies make available to you. The ratio is expressed as a percentage and is calculated through dividing the amount owed on all credit cards by the total limits on the cards. If the balance on three credit cards with $5,000 credit lines totals $12,000, then the utilization ratio is 80 percent. Such a high percentage could cause creditors to reduce your credit limits out of concern that you're taking on more debt than you can repay. Several financial publications recommend keeping the credit utilization ratio below 30 percent.

Effects

Closing an old account at the wrong time can hurt your credit score by raising your credit utilization ratio. Calculate what your utilization ratio would be if you closed the account before you cancel it. Hold off on closing the account if your ratio would increase above 30 percent, unless you are able to pay down other debts. Reducing debts at the same time that you close the account can help keep your ratio from spiking.

Warning

Not using a credit card for long periods of time could cause the card issuer to close your account because it's not profitable to keep it open with no transactions. Closing the account would reduce your total available credit and possibly hamper your credit score by increasing your credit-to-debt ratio. Credit score calculations usually weigh how much debt people have against how much credit they have available. Credit scores often drop when the total amount of debt is close to or exceeds the total available credit. Use a credit card at least one time every four months and pay off the balance immediately to avoid having your account closed.

Prevention

Consider asking your credit card issuers for higher limits to improve your credit-to-debt ratio. However, avoid using up the additional credit if the company grants your request. The goal is to raise your credit limits to reduce the amount of debt you have compared with your available credit. The U.S. Credit Card Accountability, Responsibility and Disclosure Act of 2009 requires that card issuers not increase credit limits without considering the ability of consumers to make minimum payments on their accounts. Therefore, customers with large amounts of debt may have a difficult time getting higher limits.

Considerations

The credit-to-debt ratio is an important consideration in trying to maintain a good credit score. However, there are times when other factors outweigh efforts to keep the ratio low. For instance, people who have a difficult time not maxing out credit cards may want to close accounts before they rack up more debt than they can afford to repay. Some creditors also charge their customers inactivity fees for not using their accounts. People who are paying such fees on several accounts may benefit from closing their accounts.