This is a 5 Part Series explaining the basics of good credit.
The second factor in determining good credit is your credit debt/credit limit ratio. This is the amount you owe on your credit cards in proportion to your credit card limits. Your major credits like MasterCard or Visa are included in this ratio, but so are your smaller cards like gas or retail store credit cards.
So how do you know what your debt/credit limit ratio is? You add up all your credit card debt and then add up all your credit card limits. Then, you divide the total amount owed by the total amount of your credit limits and you get a percentage number. The lower the percentage the better your credit score will be. If your number is high, work on getting your percentage lower by paying down what you owe. In this economy, you want this to be really low – aim for less than 25% ratio.
One thing that you DON’T want to do here is to close a paid off account. That would raise your debt/credit limit ratio and make you appear to be more of a risk. In today’s market, lenders may be lowering your credit card limits without warning and that will play a big factor in your credit score equation.
Your debt limit ratio represents 30% of your credit score calculation. This, along with your payment history, is 65% of your credit score, so you need to be very vigilant about these two factors.
Next week we’ll talk about your credit history – so be watching for it in your inbox.
Jill Russo Foster is the author of Cash, Credit, and Your Finances: The Teen Years. She provides practical tips for every day finances. Learn more about protecting your credit and living within your means, with Jill’s popular free reports and bi-monthly ezine, available here ==> CashCreditandYourFinances.com
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