If you regularly struggle to pay your monthly bills, your debt-to-income ratio may be too. This ratio, which you can easily calculate, compares how much outstanding debt you have to your monthly gross income. Still, you should keep close tabs on another important ratio: your debt-to-credit one.
Your debt-to-credit ratio compares how much revolving credit you are using to how much you have available. You may hear this ratio referred to as your credit utilization rate or your debt-to-credit utilization ratio.
Your revolving credit
Revolving credit is different from your mortgage, car payment and other monthly expenses. To determine how much revolving credit you have, you must look at your credit card limits and lines of credit. You may want to identify both your per-card revolving credit and your total revolving credit across all the cards or lines of credit you have.
Your debt utilization
Using your credit cards or lines of credit may be an effective way to build a good credit score. If you charge too much, though, you may have difficulty paying monthly minimums. You may also pay thousands of dollars in interest and fees. To determine your debt utilization, simply add together your credit card and line of credit balances.
Your next steps
FICO, the data analytics company that calculates credit scores, recommends keeping your debt-to-credit ratio below 30%. If your ratio is higher, you may want to try paying down your debt. You may also want to consider some debt-relief options, such as bankruptcy protection.
Ultimately, there should be more to life than constantly fighting to stay on top of credit card debt. By regularly calculating your debt-to-credit ratio, you can make informed decisions about your financial future.
