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Understanding and Managing Your Debt-to-Credit Ratio

At O1ne Mortgage, we believe that financial literacy is key to making informed decisions about your credit and mortgage needs. One crucial aspect of your financial health is your debt-to-credit ratio. In this article, we’ll explore what the debt-to-credit ratio is, how it impacts your credit score, and how you can manage it effectively.

What Is the Debt-to-Credit Ratio?

The debt-to-credit ratio, also known as the credit utilization ratio, is the amount of credit you’re using on your credit cards relative to your credit limits at a given time. This ratio is a significant factor in your credit scores and is often considered by lenders when reviewing your application for a loan or credit card.

Understanding how your debt-to-credit ratio works and using it to guide your credit usage habits can potentially help you improve your credit scores and increase your chances of securing favorable credit terms.

How to Calculate Debt-to-Credit Ratio

Calculating your debt-to-credit ratio is straightforward. Take each credit card you have and divide the balance by the card’s credit limit. Then, add up the balances and credit limits across all of your credit cards and perform the same calculation to get your overall ratio.

For example, let’s say you have three credit cards:

How Does a Debt-to-Credit Ratio Impact Your Credit Score?

Your debt-to-credit ratio is a crucial component of your credit score, making up 30% of your FICO® Score. High balances on your credit cards can significantly negatively impact your credit score. Credit experts often recommend keeping your debt-to-credit ratio below 30%. However, the lower your ratio, the better it is for your credit score.

Those with the highest credit scores typically have debt-to-credit ratios near 0%. While your debt-to-credit ratio is essential, it’s just one of many factors that go into your credit score. Other factors include your payment history, the length of your credit history, the types of credit you’re using, and recent credit inquiries.

What’s the Difference Between Debt-to-Credit and Debt-to-Income Ratios?

Both the debt-to-credit ratio and the debt-to-income ratio indicate how well you’re managing your debt, but they do so in different ways. While your debt-to-credit ratio shows how well you’re managing your credit card balances, your debt-to-income ratio assesses how much of your income goes toward debt payments, including both revolving and installment credit.

For example, if your gross monthly income is $5,000 and you’re required to make payments totaling $2,000 toward your mortgage loan, credit card minimum payments, auto loan, and student loans, your debt-to-income ratio is 40%. A high debt-to-income ratio could indicate that you’re overleveraged and may have trouble affording another payment.

While lenders consider both ratios when you apply for credit, only your debt-to-credit ratio impacts your credit score, as your income isn’t included in your credit score calculations.

The Bottom Line

Your debt-to-credit ratio is an important indicator of your credit health, particularly in how you manage your credit cards. If you have a high ratio, it could be hurting your credit score and your chances of obtaining favorable credit terms.

Review your credit report to get an idea of what your debt-to-credit ratio looks like. If it’s higher than you want it to be, take steps to pay down your credit card balances to reduce it. You can also monitor your credit score to track your progress and see how your efforts are paying off.

At O1ne Mortgage, we’re here to help you navigate your financial journey. Whether you’re looking to improve your credit score or need expert advice on mortgage services, our team is ready to assist you. Call us today at 213-732-3074 for any mortgage service needs. Let’s work together to achieve your financial goals!

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