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Credit to Debt Ratio
When dealing with credit cards you should be aware of a few important things which will help you a lot in future. Some of the things include Credit to Debt Ratio, credit score, credit history etc. They play a very crucial role in your life later on. Now maintaining a good Credit to Debt Ratio is as important because it is a parameter on which credit card companies finalize whom to pay and whom not to. Let us first understand the credit score and the FICO scores first.
The credit score is basically used in US which symbolize the creditworthiness of an individual, which is the chances of a person paying back his debts. They are used by lenders to qualify a person before lending him. On the other hand FICO is a score which shows the chances of a person to default on a loan he has taken. People have a misconception that if you close your credit card accounts which you are not using then it will help in improving your FICO scores. But in reality its not the truth.
A major role in the FICO score calculation is played by the Credit to Debt Ratio. The Credit to Debt Ratio or the Debt to Credit Ration is calculated by dividing debt used by available credit. Now it is highly important that you maintain a balanced Credit to Debt Ratio throughout your career. A Credit to Debt Ratio of 10-20% is considered to be good. Now the credit card companies make money from the interest that debtors pay them. So among many things they also look at how well you pay your credit over a period of time. They want to get some interest from the borrowers.
Here are a few ways how you can maintain or improve your debt ratio or debt to credit ratio:
- If possible start using multiple cards instead of a single card with a huge balance. You can evenly spread your balance in each credit card. This will help you to obtain a good Credit to Debt Ratio in future.
- Don't consider to close your credit cards which are not used so frequently. You can use these old accounts once in a while and maintain the accounts.
- You can ask for credit increase of your cards. Over a period of time they will improve your debt ratio. But do not charge more than the current balance in your account.
With the help of all these steps you can easily lower your FICO score. Now once you start paying all the dues of a few credit cards you can start closing them. So just analyze where you stand today and act decisively to maintain a healthy Credit to Debt Ratio.
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