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Top Ways to Manage Your Debt Ratio

Debt ratio is the difference between the amount of debt you have charged versus the amount of money the credit card has authorized for you to use, or your credit limit. This can also be referred to as revolving credit (available credit), or credit utilization. If your credit limit is $5,000 and you have charged $2,500 on the card, your debt ratio is 50%. To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. The lower your credit utilization is, the higher your credit score because it shows you're only using a small amount of the credit that's been loaned to you and that you’re not in debt.

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.

Maintaining your debt ratio can make an impact on your credit score. Here are a few tips to make sure your debt ratio is not a drain 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 4 credit cards with 20% debt ratio each, than 4 cards with one having 80% utilization ratio and the remaining 3 cards with balance of "zero."

Know Your Limits

  >> Keep the balances on your credit cards as low as possible. Aim to keep all of your balances below 30% of the credit limit.

  >> 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. The next limit begins at 50%, then 25%.  

  >> If your debt is high and approaching that 75% mark, call your credit card company and request an increase in your credit limit.

Check Your Credit Report Regularly

  >> Look at your credit report to ensure the credit card companies have accurately reported your credit limit. If they haven’t reported your limits, the FICO software will read all of your cards as maxed out.     

  >> Report any errors on your credit report immediately. The sooner errors are remedied, the better.

  >> Maintain communication with your credit card company. Call them if there are suspicious charges on your account or if you need to make adjustments to your payment schedule.

By maintaining your debt ratio, you can ensure your credit score is as high as possible. While a solid debt ratio alone is not the only element involved in the calculation of your FICO score, it is a significant factor to consider when repairing your credit.