What is a Debt-to-Credit Ratio? A Guide to Understanding and Improving Your Credit Utilization

Financial terminology can sound like a secret language, and sometimes it makes me feel as if I just walked into an economics lecture. When someone starts talking about amortization and liquidity, it sounds like they are talking about yoga poses, not your finances.

Debt-to-credit ratio may sound like one of those terms, but it’s just a fancy way of referring to how much of your credit card limits you currently use. Another term you may have heard is credit utilization ratio, which is the same thing.

The debt-to-credit ratio, also known as credit utilization, is the percentage of your available credit card spending limits that you currently use.

Understanding your debt-to-credit ratio is an important step in maintaining — or improving — your credit score. Whether you’re looking to boost your financial health or make sense of the numbers, I’m here to help you learn — and I won’t make it sound like I’m speaking in code.

Understanding the debt-to-credit ratio and how it impacts your financial life is essential. I’ll clarify this number to help you manage debt smartly and boost your credit score.

What it Measures 

Your debt-to-credit ratio is determined by dividing your total credit card balances by your total credit limits. For example, if you have credit card balances of $4,000 against a total available credit of $10,000, your debt-to-credit ratio is 40%. 

It measures precisely how much accessible credit you are utilizing. Over time, it will show how dependent you are on borrowing to pay the bills.

It’s important to remember that the ratio covers only revolving credit: credit cards and unsecured lines of credit (i.e., excluding home equity lines of credit, or HELOCs). It does not cover things like a mortgage or car loans, simply because those types of debt are amortized and not revolving in nature. This makes the debt-to-credit ratio unique: It focuses on the amount of available revolving credit used.

Why the Ratio Matters 

Your debt-to-equity ratio has a significant influence on your credit score. It is part of the Amounts Owed factor category that comprises 30% of your FICO score, second only to Payment History in importance. A high ratio will catch creditors’s attention as they worry about borrowers who are overly reliant on credit and have fewer options to pay back their debts.

Creditors see a low debt-to-credit ratio as a sign you won’t default — meaning you will repay the money you owe.

A lower ratio confirms that you are managing your credit wisely. It should improve your credit score and make you an attractive candidate for loans and credit cards.

The ratio helps creditors decide how much to offer you in a loan or credit card limit. A high ratio can lead to higher interest rates or even the denial of new credit. That’s why it’s vitally important to have sound credit health and to get good deals on borrowing to keep this ratio low.

The Ideal Debt-to-Credit Ratio Range 

What is a good debt-to-credit ratio? It depends on whom you ask. Most creditors want to see a ratio no higher than 30%. 

Keeping the ratio under 30% indicates that you use debt wisely and don’t depend too much on borrowed money. However, you should aim for a ratio below 10% if you want to optimize your credit score. 

Lower is better regarding your ratio, as it means you present less of a default risk to a lender, enabling better credit opportunities and interest rates. It shows you have control over your borrowing habits. 

Naturally, everyone’s financial situation is unique, so the impact of your debt-to-credit ratio depends on other factors, including your income and payment history. The idea is to strike a debt-to-credit balance that meets your needs without getting out of hand. 

In an emergency, unexpected credit card spending may drive up your debt-to-credit balance. Of course, that probably won’t be your biggest immediate worry. To prevent long-term harm to your credit score, you may want to consider paying off your credit card debt through a consolidation loan or using a balance transfer credit card. 

These options could give you breathing room and better interest rates so you can pay off your debts in less time. 

Calculating your debt-to-credit ratio is essential to keeping your credit utilization in line. I’ll show you step by step how to easily determine your ratio.

1. Gather Your Credit Information

First things first: You need to get details on all your revolving credit accounts, including credit cards and unsecured lines of credit. Exclude installment loans, like mortgages and auto loans, and secured lines of credit, such as a home equity line of credit (HELOC), because they’re not considered part of the credit utilization calculation. 

Create a list of revolving accounts showing the current balances and credit limits. You should find this information on your latest credit card statements or by logging onto your online accounts. Include all your credit cards and any unsecured revolving credit accounts, even those you’re not using. 

Mortgages and auto loans are installment loans and don’t count in your credit utilization ratio. Neither do other secured lines of credit, including home equity lines of credit (HELOCs).

Including every eligible revolving credit account in this calculation is essential, even if you use some sparingly. Each account contributes to your overall credit limit, which can help lower your debt-to-credit ratio if you keep balances low. The more complete your list, the more accurate your calculation will be.

2. Apply the Calculation Formula

Once you’ve gathered all your account data, it’s time to calculate your debt-to-credit ratio. You can use an online calculator, a spreadsheet, or old-school pencil and paper.

This percentage represents the available credit you’re currently consuming. To maintain a healthy credit score, keep your ratio as low as possible, ideally less than 30%.

3. Learn From This Example

Let’s consider an example. Assume you have three credit cards as follows:

Now, you can calculate your card ratios — the individual and overall figures. You can aim for good credit utilization that improves your credit health over time.

Your debt-to-credit ratio, also known as credit utilization, directly affects your credit score. A low ratio helps lenders perceive you as financially responsible. The lower the ratio, the better your credit score should be. In this regard, even small changes in the ratio can impact your credit score. That’s why it’s so crucial to keep your ratio at bay.

FICO and VantageScore Weigh the Metric Heavily

Both major credit scoring models, FICO and VantageScore, consider your debt-to-credit ratio very important. In the FICO scoring model, the debt-to-credit ratio appears in the “Amounts Owed” category, which comprises 30 percent of your total score. 

FICO considers the overall debt-to-credit percentage and the ratios on individual accounts. If your utilization suddenly spikes — for instance, by making a hefty charge on a credit card — your score can drop relatively quickly, even if you’ve maintained a good payment history.

VantageScore, in contrast, considers credit utilization to be an independent factor. Said differently, it’s given independent and specific weight, separate from other debt-related metrics regarding the amount owed.

As with FICO, VantageScore looks at your overall debt-to-credit ratio for each account. Both models like to see a lower ratio. VantageScore can be more sensitive to changes in individual account balances. That’s why tracking total and individual account ratios is essential to prevent surprise drops in your credit score.

So, while the two models agree that debt-to-credit is essential, they treat the ratio somewhat differently when computing a score. FICO weaves it with other aspects of your total debt, but VantageScore just shows it directly. This is one reason why the two models can produce different scores, even with other factors and conditions remaining the same.

Comparing the Ratio to Other Credit Factors 

While your debt-to-credit ratio is essential, it’s not the only factor influencing your credit score. Payment History is FICO’s prime consideration, comprising 35% of your score. Creditors are inclined to approve applicants who make monthly credit card payments on time. 

In short, Payment History edges out Amounts Owed, which includes the debt-to-credit ratio, in FICO’s scoring algorithm. A low credit utilization won’t protect your score if you miss payments.

Another FICO scoring factor is the New Credit in your credit report, accounting for 10% of your score. Hard inquiries occur when you authorize lenders and card issuers to pull your credit reports during the application process. Each one has a small impact on your score, but if too many are done within a narrow window, it could cause a bigger drop. 

I recommend waiting six months between credit card and loan applications unless you are rate shopping for a mortgage or car loan. Rate shopping within a short period will do little harm to your score.

Credit Account Age is another important consideration, worth 15% of your FICO score. An older credit history helps you demonstrate to lenders that you have experience managing credit. That’s why keeping old accounts open is good even if you don’t use them anymore (as long as they don’t charge an annual fee!). Older accounts will raise your score only if you’ve always paid your bills on time.

However, even older accounts will only partially counterbalance a high debt-to-credit ratio, especially if your current spending habits suggest you rely too heavily on credit. 

The final 10% of your FICO score stems from your Credit Mix. This can include any type of debt, including credit cards (regular and store-issued), mortgages, and auto, student, and personal loans. Diversifying your credit mix is helpful, but this factor plays a much smaller role in your FICO score than your debt-to-credit ratio. 

While a broad mixture may show that you are a responsible borrower, a high debt-to-credit ratio will erase this benefit. A well-maintained payment history, few hard inquiries, a long credit history, and a good credit mix combined with a low debt-to-credit ratio contribute to a high credit score.

Here are a few practical ways to help you lower your debt-to-credit ratio and enhance your credit profile. These approaches enable you to control your credit utilization, which in turn can increase your score.

Pay Down Your High Balances

Paying down outstanding debt is an effective method of reducing your debt-to-credit ratio. One good way to go about it is using the Avalanche Method.

Under this approach, you pay off high-interest debt first. This method helps you to save money on interest as you chip away at the balances. Still, you must be patient because you’ll deal with the most expense balances first. 

An alternative is the Snowball Method, in which you repay small debts first. This is great if you get a buzz from paying off a loan. It doesn’t save you much interest, but the quick wins motivate you to pay off your debt.

Another consideration is debt consolidation. You can simplify your payments via balance transfers to a new card with an introductory 0% APR for six to 18 months. Or you can take a personal loan to pay off your credit cards and repay the loan in monthly installments.

Paying off your balances improves your debt-to-credit ratio. However, refinancing incurs extra costs: transaction fees for balance transfers and origination fees for personal loans.

Whichever strategy you choose, consistently make your payments on time. Over time, you’ll eliminate your debt and lower your credit utilization, bolstering your credit score.

Increase Your Credit Limits

You can also decrease your debt-to-credit ratio by increasing your credit limits. This can be as simple as picking up the phone and calling your current credit card issuers to request an increased credit limit. 

If the issuer obliges, the increased available credit will lower your overall utilization ratio as long as you don’t increase your spending. On the other hand, if you immediately go on a shopping spree, your debt-to-credit ratio could increase and hurt your score.

Let me offer you a word of caution: avoid this strategy if you tend to overspend. It can get you into worse trouble unless you temper this approach with discipline. Use the excess credit to improve your credit utilization ratio, not as a license to add new debt.

Avoid Accumulating New Debt 

Continuing our theme of disciplined spending, one way to avoid new debt is to use a budget that helps you live within your means. When paying off debt, it’s essential to keep additional spending at a minimum. 

Focus on the necessary expenses and consider using cash or a debit card to pay for items so you’re not adding to your credit card balances. 

While you are paying down your debt, keep your credit cards in your sock drawer and remove them from any apps you may use for payment (i.e. PayPal or Amazon) so you aren’t tempted to use them.

This approach ensures that your debt level does not increase and helps keep your debt-to-credit ratio healthy. It would be best if you avoided applying for new credit. Any time you apply for credit, a hard inquiry pops up on your credit report, lowering your score. Moreover, opening new accounts increases spending temptation, which could jack up your utilization ratio. 

By avoiding unnecessary debt and hard credit inquiries, you can create a much better scenario for getting your credit utilization and overall financial health back in line.

Your debt-to-credit ratio isn’t just financial jargon you should dismiss. It speaks volumes about how you use credit — and whether you use it responsibly. 

If you want a better overall credit profile, you need to understand how the debt-to-credit ratio (or credit utilization) impacts your scores and reports. Keep this ratio in line by paying off outstanding balances, increasing your credit limits, and avoiding new debt.