It’s very important to ensure you have a stable Credit to Debt Ratio. Here’s how to calculate this value:
- Add up your outstanding debt.
- Add up the amount of credit available to you on all credit lines.
- Divide your outstanding debt total by the total amount of credit that is available to you.
Example:
- Outstanding Debt = $14,000
- Available Credit = $36,000
- Credit to Debt Ratio = $14,000 / $36,000 = 38.8%
A high credit to debt ratio (percentage) lowers your credit score.
In the past, it was possible to use up to 30% of your available credit without lowering your credit score, but now, some credit experts are recommending that you keep your utilization closer to 10%.
You also cannot just obtain several credit cards and leave them untouched to improve this calculation, however. Lenders fear you will utilize all of your available credit, which will jeopardize their chances of being repaid.
Select a few credit accounts, and use them in moderation and pay them off each month. This makes these credit lines active, and also shows that you actively use only a small portion of the available balance.
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