WTV WEALTH WEDNESDAY

Debt Ratios

Debt ratio is the difference between the amount you owe and the limit on the account. Sometimes this is referred to as available revolving credit. If your credit limit is $1,000 dollars and you have charged $400 on the card, your debt ratio is 40%.

Debt ratio accounts for 30% of your FICO score, which makes it the second highest factor the credit agencies take into account when looking at your credit.

Here are a few tips for you to make sure your debt ratio is not a negative weight on your credit score:

Maintain your total credit

• Don’t ever close credit cards if you can avoid it. The more cards you have open, the higher your total of available credit. Credit calculating software takes your TOTAL available credit versus TOTAL debt into account. Closing a credit card will decrease your overall available credit without decreasing your debt.
• Keep your debt even across your credit cards. It is better to have four credit cards with 20% debt ratio, than one card with 80% ratio and three cards with no debt.

Know your limits

• Keep the balances on your credit cards as low as possible. Aim to keep all of your balances below 50% of the credit limit on that card.
• The FICO software ranks your credit debt based on levels. If your credit card debt is more than 75% of your credit limit, it will cause serious damage to your credit score. To avoid losing points keep your balance blow 40%.
• If your debt is high and approaching that 75% mark, call your credit card company and request an increase of your credit limit.