The Importance of Balancing Your Debt to Credit Ratio

Generally, an acceptable debt-to-income ratio should sit at or below 36%. Some lenders, like mortgage lenders, generally require a debt ratio of 36% or less. In the example above, the debt ratio of 38% is a bit too high. However, some government loans allow for higher DTIs, often in the 41-43% range. Why is Your Debt-to-Income Ratio Important?

Your debt-to-income ratio can be a valuable number — some say as important as your credit score. It’s exactly what it sounds: the amount of debt you have as compared to your overall income. Check Mortgage Rates. Lenders look at this ratio when they are trying to decide whether to lend you money or extend credit.

It’s important to note that your credit utilization ratio is influenced almost entirely by your revolving credit card debt. The amount of credit you’re using on other types of loans makes very.

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While your credit score isn’t directly impacted by a high debt-to-income ratio, some of the factors that contribute to a high debt-to-income ratio could also hurt your credit score. More specifically, high credit card and loan balances, which may play a role in your high debt-to-income ratio, can hurt your credit score.

The Debt to Credit Ratio is based upon both your revolving and installment loans. It is the percentage of the credit available to you that is used up with debt. Available Credit is Important to Credit Score. Imagine a bath tub that is empty. It is 0% full. Gradually, you fill it with water. When it is about to overflow onto the bathroom floor, it is 100% full. Your credit rating is the same way. When you start out, you have "No" credit rating.

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Cheating the Credit Score System | How Timing Impacts Utilization That means your balance on that $5000 credit card should stay below $1500. This practice works better for you as well, keeping some cushion in your accounts for emergencies. Managing your Debt-to-Credit Ratio. There are a few tricks beyond merely using less of your credit to help keep this number under control.

Five Tips for Maintaining an Optimal Debt-to-Credit Ratio. Your debt-to-credit ratio is the amount of debt you have outstanding compared to the amount of credit that has been extended to you. For example, if you have two credit cards, one with a credit line of $1,000 and one with a credit line of $500, your total available credit is $1,500.