Our guide tackles the basics of disposable income and how you can use it to budget.
What is a debt-to-available-credit ratio?
Debt-to-available-credit, also called your credit utilization ratio, refers to how much of your available credit you’re using. The more you’re using and the less you have available, the higher this percentage is. Lenders consider this among the many factors when deciding to offer credit and how much.
Your debt-to-available-credit ratio impacts your credit score, and the higher your ratio, the lower your score. This ratio and your total amount of debt account for 30 percent of your FICO score, making it a large factor in how lenders regard you as a potential borrower. In fact, it’s the second-highest factor used for computing your FICO score. If you have a high debt-to-credit ratio, lenders may think you’re overextended and too risky to lend money or credit to. A high credit utilization score could make it more difficult to buy a home.
It’s typically recommended that you keep your debt-to-available-credit ratio at 30 percent or less of total available credit, although maxing out a single credit card can ding your score, as well. You can avoid this by keeping your credit utilization under 30 percent on each individual card and your overall total credit. For the best rates and most favorable terms from lenders, it helps to keep credit utilization between 1 percent and 10 percent.
Has your credit score taken a hit because of your debt-to-available-credit ratio? Here are seven easy ways to improve your score.
Debt-to-available-credit ratio example
Say you have three credit cards – one with a $2,000 limit, one with a $2,500 limit, and one with a $3,100 limit. This makes your total available credit $7,600. If you have a $1,500 balance on the first one, a $2,300 balance on the second and nothing on the third, this makes your total debt $3,800 and gives you a debt-to-credit ratio of 50 percent, which is considerably higher than the recommended ratio.
Do you have bad credit but need a credit card? Here are some options for people with less-than-stellar credit.