{"id":52440,"date":"2024-02-06T09:42:28","date_gmt":"2024-02-06T17:42:28","guid":{"rendered":"https:\/\/financer.com\/?post_type=wiki&p=52440"},"modified":"2024-05-03T11:43:16","modified_gmt":"2024-05-03T18:43:16","slug":"debt-to-limit-ratio","status":"publish","type":"wiki","link":"https:\/\/financer.com\/loans\/articles\/debt-to-limit-ratio\/","title":{"rendered":"What is Debt-to-Limit Ratio?"},"content":{"rendered":"\n

What is Debt-to-Limit Ratio?<\/h2>\n\n\n\n

Debt-to-Limit Ratio compares the total amount of debt you’ve accumulated on your credit accounts to the total credit limit across all those accounts.<\/p>\n\n\n\n

Commonly referred to as credit utilization<\/a>, this ratio offers a snapshot of your current financial obligations in relation to your available credit. Essentially it measures how much of your available credit you are actually using.<\/p>\n\n\n\n

Why is it Important? <\/h4>\n\n\n\n

Lenders and credit scoring models view the Debt-to-Limit Ratio as a significant indicator of your creditworthiness. A high ratio suggests that you are close to maxing out your credit limits, which can be seen as a red flag, indicating potential financial distress or mismanagement. <\/p>\n\n\n\n

Conversely, a low ratio is indicative of responsible credit usage, suggesting that you are well within your means to manage and repay your debts.<\/p>\n\n\n

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Did You Know?<\/h3>

Debt-to-limit ratio is the second most influential metric in determining your credit score, and accounts for about 30% of your score. Payment history is the first.\u00a0<\/p><\/div>\n\n\n

How is the Debt-to-Limit Ratio Calculated?<\/h2>\n\n\n\n

The Debt-to-Limit Ratio is calculated by dividing your total revolving debt by your total credit limits on all your revolving accounts. <\/p>\n\n\n\n

The result is then multiplied by 100 to get a percentage. This percentage reflects your credit utilization rate, a critical measure of your credit health. <\/p>\n\n\n\n

Here\u2019s the formula:<\/strong><\/p>\n\n\n\n

Debt-to-Limit Ratio (%) = (Total Credit Limit \/ Total Outstanding Debt) \u00d7 100<\/p>\n\n\n\n

Step-by-Step Calculation<\/h4>\n\n\n\n
    \n
  1. Identify Your Total Outstanding Debt<\/strong>: Sum up the balances on all your revolving credit accounts, such as credit cards and lines of credit. This total is the amount of debt you currently owe.<\/li>\n\n\n\n
  2. Determine Your Total Credit Limit<\/strong>: Add together the credit limits for all your revolving accounts. This figure represents the maximum amount of credit you can access.<\/li>\n\n\n\n
  3. Calculate the Ratio<\/strong>: Divide your total outstanding debt by your total credit limit. Multiply this number by 100 to convert it to a percentage.<\/li>\n<\/ol>\n\n\n\n

    Example<\/h4>\n\n\n\n

    Let’s say you have three credit cards with the following balances and credit limits:<\/p>\n\n\n\n