Debt To Credit Ratio
If you have recently been turned down for a loan, your debt to credit ratio may be the problem.
Lowering your debt to credit ratio is one way to improve your credit score and your credit worthiness with lenders. Improving one’s credit score can sometimes be a tricky process, but understanding this ratio and its effect on the overall score is one key to having the best chances securing the financing you need.
Factors Affecting the Credit Score
Many factors are used by lenders to determine your credit score other than the debt to credit ratio. Among these items are your record of making payments on time, the length of your credit history, the number of new accounts you have recently opened and the number of inquires on your credit record.
Inquires are made each time you attempt to open a new account, and many lenders see a large number of inquiries as an indicator that the borrower may be seeking credit due to financial difficulties.
Effect of Closing Older accounts on the Debt to Credit Ratio
While it is possible to have too many open accounts, a bigger problem is often closing accounts. When you close an account, even one you do not use regularly, it lowers the amount of available credit you have. Unless you are paying down your debt significantly at the same time as closing the account, this can have a negative effect on the debt to credit ratio. Increasing the ratio, by closing an account or increasing the amount of money owed, can have a negative effect on the credit rating.
Effective Use of Debt Consolidation
Many people attempt to use debt consolidation in a way that may have a negative effect on their credit report and scores. It is important to choose a reputable company and ensure the accounts are paid as per your agreement. This one payment is usually much lower than the total amount of the minimum payments on several credit cards. When used correctly, the process can make it much easier for the consumer to make the payments on the debt. In addition, the consolidation loan makes it possible to pay off debts in just a few years that would take a lifetime of minimum payments to credit card companies. Regardless of what you might read on the web or your banker might tell you, do not close these accounts once they are paid in full. This will have a negative impact on the credit report by negatively affecting the debt ratio. The closed account still shows up on the credit report; however, the good history of the account is wiped clear. It can no longer be used to improve the FICO score. Even though you leave the account open, avoid the temptation to charge more on the cards. If you do so, you will now have the payment for the consolidation loan as well as the credit card debt once again.
The Effect of a High Debt to Credit Ratio on Your Fico Score
The credit history is one of the most important parts of the credit history for banks and financial institutions. It can affect the FICO score in a positive or negative manner. They use the available information to calculate this ratio in order to see if you are close to financial problems. Individuals that are close to being in financial danger will pay more in interest rates. If the financial institution determines that you are over your head in debt, they may not provide the loan for which you apply.
Recommend Debt To Credit Ratio
Consumers that are using more than 50% of their available credit will find that there is a negative effect on their FICO score. In fact, if you can keep the load below this mark, you will find you it much easier to qualify for loans and new credit. If you can keep it below 35%, banks will love you even more.
Other Ways to Improve your FICO Score
If there are negative marks on your credit report, they can have a negative impact on the score. Fortunately, time is your best friend in this case. As time passes, the negative marks have less of a negative impact on your repot. After seven years, the negative marks are not reported on the account. Even charge offs and collections are required to drop off at this time. However, court actions, including judgments and bankruptcy can remain on the credit report for a full ten years. In addition, while these court actions cannot affect one’s credit report after the reporting time, they are a part of the permanent court report and others may still find the action through a careful search. Even if you have a low credit to debt ratio, but have one account that is maxed out, some experts recommend transferring part of the debt on that account to one or more other accounts to present a more balanced looking report.
The debt to credit ratio can have a big impact on one’s credit report, FICO score and ability to obtain new credit. If you are faced with a heavy debt load, you might consider ways to lower that ratio, either through a debt consolidation loan or by making larger payments to pay down existing debt. Once accounts are paid, never close them as this can negatively affect the ratio by lowering the amount of credit available. Once debts are paid, avoid the temptation to increase them again, especially if using a consolidation loan. Once several accounts have been paid in full, a review of one’s financial situation can be used to decide if it might be a good idea to close one of the accounts so there are fewer unused credit accounts. One factor that might be considered in choosing the account to close would be those accounts that have a large annual fee to keep the account open. Careful manipulation of the credit accounts can help you to have a better debt to credit ratio and qualify for better interest rates.