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The Debt to Credit Ratio: Do You Need More Credit?

Understanding the Debt to Credit RatioIf you’d like to improve your credit score, that last think you’d probably think to do is get more credit.  Yet that might just be what you need. This is where the debt to credit ratio is key.

One component of your credit score is based on how much you owe.  Lenders are judging how financially responsible you are by looking at your debt to credit ratio.

Say you have a credit card with a $6,000 limit, and you have a $4,000 balance on the card.  Your debt to credit ratio is 66%.

That’s a problem because most lenders frown on debt to credit ratios that are higher than 50%.  Lenders actually prefer debt to credit ratios of 30 to 35%, ideally.

An excellent way to improve your credit score is to improve your debt to credit ratio.

The Slow Way to Improve Your Debt to Credit Ratio

One solution to improve your debt to credit ratio would be to pay down your credit card balances, but most people can’t do that quickly.  Even if you do have some extra money to apply on your debt, you likely don’t have enough to make a significant difference.

The Quick Way to Improve Your Debt to Credit Ratio

A faster solution is to ask for a higher credit limit with the lenders that you are in good standing with.

If we go back to our credit card example earlier, if you’re lender agrees to increase your credit limit from $6,000 to $12,000, your debt to credit ratio on that card now becomes 33% even though you haven’t made any additional payments on your $4,000 balance.  Just by asking for more credit, you’ve fallen into the magical debt to credit ratio (according to the lender, of course).

The key here, is even though you may ask for and get a higher limit, don’t use it!  Keep your balance below 30 to 35% of the amount you are approved for in order to improve your credit score.

Remember, too, that lenders often look on a card by card basis.  While your first card may now be at 33%, if you have another card that is nearly maxed out, your high debt to credit ratio there will affect your credit.  Try to get all of your card balances into the ideal debt to credit ratio.

If simply raising the credit limits won’t do the trick, apply any extra money to the balance of the card with the highest debt to credit ratio.

Building a long-term reliable history with creditors who will report your good credit to the credit bureaus will go a long way to helping you to establish long-term good credit. Make sure that the credit agreements that you now have remain current and try to quit using additional credit.

Ironically the people who have the highest credit scores are the people who have a solid access to credit but don’t use it too much.

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