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Five Tips for Maintaining an Optimal Debt-to-Credit Ratio

Written by Mechel Glass on August 1, 2014 in Credit  |   No comments

Your debt-to-credit ratio—also called your credit utilization ratio—is an important factor used in calculating your credit score, which lenders use to gauge your risk as a borrower. For this reason, it’s critical to understand if you’ve overextended yourself and if your debt-to-credit ratio could hurt…

five-tips-for-maintaining-an-optimal-debt-to-credit-ratio

Your debt-to-credit ratio—also called your credit utilization ratio—is an important factor used in calculating your credit score, which lenders use to gauge your risk as a borrower. For this reason, it’s critical to understand if you’ve overextended yourself and if your debt-to-credit ratio could hurt you in the future.

What is a 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. If you were to charge $500 on the first credit card, your total available credit would be $1,000, and your debt-to-credit ratio would be 33 percent.

(Read more: What Information Is on My Credit Report?)

How to calculate your ratio

It’s very simple to calculate your debt-to-credit ratio. First, add together all the available credit lines you’ve been extended (using the example above, $1,500). Then, add up all the debt accumulated on those credit lines ($500), and divide the total debt by the total available credit ($500/$1,500) to get your debt-to-credit...

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