If you have a relatively decent credit score and you want to keep it that way, you need to find out what your debt ratio is and work to keep it in the green (k.e. good) zone. Your debt to credit ratio is the amount of debt that you have relative to the amount of credit available to you. For example, if you have a credit line of $10,000 on a credit card account and your balance is $5,000, your debt to credit ratio is 50%. If your balance is $10,000, and your credit card account is maxed out, your debt to credit ratio is 100%.
Many personal finance pros will tell you to try to maintain the debt to credit ratio under fifty percent. As the ratio goes up, your credit rating goes down. So, in the example above, with a $10,000 credit card account limit, you would not want to carry a balance of more than $5,000.
Creditors use a variety of criteria and standards to make a judgement of your credit score. Among all of the factors that they use, however, your debt to credit ratio consistently ranks pretty high on the list. For lenders, it is a great snapshot of your credit. By simply looking at this ratio on your credit report, a creditor can get a very clear idea of how deep in debt you are. Regardless of your credit rating, if based on your debt to credit ratio, it seems like you are in deep financial trouble, you have a lot less chance of getting the loan that you desire. And, if you do manage to get the loan, odds are that you are going to end up paying a much greater APR than you probably had depended on.
If you want, you can easily use the information that you know about the debt to credit ratio to improve your credit score. All you have to do is to pay down the balances on certain of your credit cards. Then set those credit cards aside. Don’t close your account but keep it open. This way it shows up on your credit report as you having access to a large pool of credit that you are not using.
The practical effect of this is that your debt to credit ratio is lowered. And, as a result, your credit score goes up. A second reason for keeping your credit accounts open is that credit reporting agencies tend to give a lot more credence to long held accounts than they do to shorter held ones. In other words, everything being equal, a credit card account that you have held for ten years is more positive for your credit score than a card that is only two years old.
But, you would be making a mistake if you are depending on the credit report companies making sure that everything is correct in your credit report . Agencies are notorious for carrying credit errors for years on consumers records. It is up to you to keep track of everything in your credit report and correct the errors that you find in them.
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