Your debt-to-credit ratio is the amount of debt you have incurred versus the credit limit the credit card company has given you. For example, if you have a credit limit of $2,000 and you have a balance of $500, your debt-to-credit ratio is 25%.
Your debt ratio makes up about a third of your FICO credit score, which means it’s an important aspect lenders look at when deciding whether to lend to you. However, not everyone understands how to successfully manage this ratio to have a positive effect on their credit score. Here’s how:
-Don’t ever close a credit card if you can help it, even if you don’t use it anymore. It may seem counterintuitive, but the more credit cards you have the higher your available credit will be. If you think you’ll be tempted to use a card that you’ve paid off, simply cut it up instead of closing the account. Credit Cards
-Try to keep your amount of debt about the same across all your cards. It’s better to have three different cards with a 15% debt ratio than one card with a 45% ratio.
-Shoot for keeping a balance of 50% or lower on all of your cards. The FICO system is based on levels, and a debt ratio of more than 75% can seriously ding your credit score.
-If your debt level is climbing toward the 75% mark, ask your credit card to give you a higher limit. This will bring your debt down to a lower percentage of your total limit.
-Make sure your credit card limits are accurately reflected on your credit report by checking it regularly.
-Immediately report and dispute any errors on your report.
-Keep an open line of communication with your credit card company. If you need to change your payment schedule or see any unusual activity on your statement, don’t hesitate to give them a call.
By maintaining a balanced debt-to-credit ratio, you’ll have a significant chance of increasing your all-important credit score.