The Importance of Balancing Your Debt to Credit Ratio

The FICO credit scoring algorithm — the most popular in the United States — bases 30 percent on your current debt levels, including your ratio of debt to available credit on your revolving accounts, such as credit cards. Keeping your debt to credit ratio low will improve your credit score.

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But what is a debt-to-income ratio? A debt to income ratio (DTI) is the percentage of your gross monthly income that goes to debt payments. Debt payments can include credit card debt, auto loans, and insurance premiums. How to Calculate DTI. In order to figure your debt-to-income ratio, you need to determine your monthly gross income before taxes.

How to lower your DTI ratio. There are two key ways to lower your dti ratio: reducing your debt and increasing your income. Here are some tips for decreasing your DTI ratio. Ask for a raise at work to boost your income; Take on a part-time job or freelance work on the side; Make extra payments to your credit card to lower the balance

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It’s important to keep your debt-to-income ratio low and work to eliminate debt altogether. If you are dealing with sky high student loan balances , or steep credit debt while only making a modest salary, you could look like a risk to prospective lenders.

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Let’s say you have a credit card with an $8,000 credit limit on it, and you have a balance of $5,000 due. Your debt to credit ratio would be: 5,000 8,000 = 0.625 ratio or 63 percent utilization of your available credit. So, what does that mean? Is it bad to have a debt to credit ratio of 63%? What is the best debt to credit ratio?

3 Steps to Lower Your Credit Utilization Ratio and Increase Your Credit Score! The debt to credit ratio is the percentage of the total credit you have used up. installment loans include student, car and home loans based on fixed amounts of money. Your debt to credit ratio is always 100% or 1:1 for these types of loans because you always use the maximum amount available for your expenses.