Your Credit to Debt Ratio

The relationship between closing credit card accounts and your FICO score.



Understanding the Credit to Debt Ratio can help you improve your credit score. You need to know what happens when closing credit card accounts and how that affects your FICO score as an important part of getting out of debt and improving your credit rating.
Fees

Consider debt consolidation to pay off those credit cards. One payment, usually a lot lower than your credit card payments, can help you get back on track.
One of the biggest fallacies I’ve seen perpetrated on the web, at the bank, etc., is that you should close credit card accounts that you are no longer using to improve your FICO score.

When you close the account, your “history” is gone for that credit card … yes, it will still show up on your Credit Report; but the “good history” will no longer be included in the calculation of your FICO score.

One thing that is very important to your FICO score is called the credit to debt ratio. The credit to debt ratio is calculated as follows:

Debt Used divided by Available Credit = Debt Load

Example:
$2,000 of debt charged to a credit card with a limit of $5,000 $2,000/$5,000 = a debt to credit ratio of 50%

$10,000 of credit card debt with total available limits of $10,000 (means you are maxed out on all your cards!) = $10,000/$10,000=100% debt ratio

Banks and other financial institutions place a lot of emphasis on your credit history (obtained from you and your credit report) and on your FICO score. Based on this available information; they can easily calculate what your debt to credit ratio is to see just how close to being in financial trouble you are. The closer you are to being over your head in debt, the higher the interest rate you will pay, if you get the loan at all!

The debt to credit ratio is used in the calculation of your FICO score as well; so the higher your debt load to the available credit you have to draw on, the lower your FICO score can be. If you can keep your debt load (the debt part of the debt/credit ratio) under the 50% mark, the better off you will be in the long run.

In summary, if you consider the above, you can see why it wouldn’t be a good idea to close a paid off account:
  1. it also closes the good history on the account
  2. it reduces the available credit and increases the debt ratio
What you want to also consider is how you will handle the paid off account. If you can have it and not use it; then do so, providing you aren’t paying outrageous annual fees to have the card sitting in your wallet or at home.

Once you have paid off several accounts, then you can review your financial situation and decide if closing one account would be a good idea; after all, you don’t want a lot of unused credit either as it can impact your ability to borrow for a home or car loan; and it’s harder to keep track of multiple cards/accounts as well.

Read more tips on improving your credit score, tips on getting out of debt, and learning money management skills.

Credit Card Resources

Visa, Mastercard, American Express, Discover and more! Looking for a new credit card? Find the right card at the right rate. Compare offers and apply online.

Apply now for the Discover® Student Card-No Annual Fee

Click Here to Apply for the Discover® More Card!

In over your head? Money problems stressing you to the max? Check out fast debt elimination now!

Related Articles

Learn more about credit cards and your credit score with these related articles:

All about Credit Cards ... a series of articles on choosing credit cards, how to evaluate them and where to get them, quickly and easily!

Your credit score ... what to do, where to go, and how to handle it ...

Return to the top of Your Credit to Debt Ratio






Getting The Answers You Need

Need help to get your expenses under control fast? Check this out.
Be sure and check out the various debt solution reviews, tips, and articles provided on DebtSteps.com:

Find Your Solution offers a comprehensive list of reviews to get out of debt once and for all. Get answers on bankruptcy, consumer credit counseling, debt settlement, money management, budgeting, loans and mortgages.

Debt Relief Tips & Articles to guide you on your way to financial freedom. Get the lowdown on dealing with debt collectors, handling money problems, understanding your credit, and more.


What's New?

New Bankruptcy articles ... Bankrupty and credit report updates, Can bankruptcy stop foreclosure? Find out here, What you must know about declaring personal bankruptcy, Learn how to rebuild your credit score after bankruptcy.

Need help on determining the right mortgage for you and your family?

The best Debt Elimination Tip you will ever find!

Find reliable debt settlement companies in your area.

Free household budget form automatically calculates totals and financial ratios to help you make smart spending decisions

Get more on what's new ...



Get Online Debt Relief Now


Understanding the Credit to Debt Ratio.