Whoever created credit cards was really onto something. Buying things you want without producing money in real-time makes shopping ten times more stress-free. But what happens when you spend too much? The thrill of free spending can sometimes make you forget that credit cards come with strict limits. And when you overstep those limits and cross that threshold, you can be putting yourself at risk of ruining your credit score. Which means all your hopes and dreams of buying a picket fence house? Down the drain; gone for good.
What is Debt-to-Credit Raito?
Debt-to-credit ratio (DTC), commonly known as the credit utilization score, is a numerical value that tells you about the credit you have already used or are currently using and the total amount of credit you have.
Typically, DTC is calculated in percentage, which makes it easier for you to keep track of how close you are to your credit limit. For instance, the higher the percentage level, the closer you are to the finish line. Due to this, according to FICO, having a DTC rate below 30% is an ideal number since it doesn’t put you at risk of muddying your credit score.
Can Debt-to-Credit Ratio Affect Your Credit Score?
The quickest answer to that is: Yes. Your debt-to-credit ratio definitely affects your credit score. So much so that the entire eligibility criteria for taking out loans is based on it. Thus, if you think that going over the credit limit is okay, think again. Your ability to finance a car, medical bills, tuition fees, and, most of all, a house depends on your credit score.
If you want to invest in a real estate property or buy a house, chances are you will have to formally request the bank for a loan. However, depending on your credit score, the bank might deny your request. This is because your credit score can tell a lot about you. Money lenders can see how you manage your finances, and if you cannot balance your money properly, they might not want to give you a loan.
Here’s How to Calculate Your Debt-to-Credit Ratio
Now that you know that your DTC rate can severely impact your credit score, it’s time you find out how to calculate it. This way, you won’t have to worry about the unknown hindering you from buying a house. Moreover, with a foolproof formula, you can determine how much credit you’ve already spent and how far away you are from your credit limit. Curious? Take a look below for this easy formula:
Your Credit Balance ÷ Your Credit Limit
The result you get will be valued as a percentage. This number is then going to signify your debt-to-credit ratio. For instance, let’s say your credit balance (the money you owe) is $2,500, and your total credit limit is $35,000. You’ll then have to divide $2,500 from $35,000 to get your DTC rate. So 2,500 ÷ 35,000 = 0.071. When you convert it, you’ll get 7.1%. And that’s all that it takes to calculate your DTC rate. Now that you know how to do it, you can be mindful of swiping your card left and right. Just think of your credit limit, and you’ll be all set.
A debt-to-credit rate above 30% can jeopardize your credit score. That is why it is crucial to keep your assets and spending in check. If you want to invest your money more smartly, invest in a property to keep it flowing. Contact Red Door Funding at (832) 539-1099 for more information.