What is the Debt to Limit Ratio?

This term was a new one to me, but it is actually one of the most important financial terms if you’re interested in knowing the ins and outs of your credit score, and how certain items and happenings may impact this vital score, if you go to get a home mortgage loan or happen to need credit for some other major purchase such as a car or home improvements such as an addition or other major home improvements that require large amounts of capital.

The term I’m talking about is the “debt to limit ratio”, and what it means is how much, out of your total available credit have you used thus far? This means that yes, credit card and other companies are looking at not only whether you’ve ever surpassed your credit limits on lines of credit and credit cards, but also how close you are to maxing them out. So essentially, it doesn’t matter if you haven’t maxed your card out or even gone over the limit, they actually look at how close you are to your various limits as a means of determining what type of credit risk you are.

Take for example, you have a $10,000 total credit line through various banks and credit card lenders. You have spent $9,500 of that money though, so this means that you have used most of it and have not made much progress in paying it down. This is looked at by lenders as a higher risk loan or line of credit, and therefore in response to that higher risk what do you think they will do?

Well, of course they will either charge you a premium annual percentage rate for taking on a larger risk in their eyes, or increasingly many lenders are saying no to these loans that they view as a higher risk of not being paid back, not being paid timely, or of being a poor risk in the near future as far as ability to pay the loan or line of credit off.

What you can do is make sure that first of all, you do not have a whole lot of credit cards floating about out there. This means that some of your favorite airline miles credit cards, gas credit cards and other special interest credit cards that you may like to use, such as a retail store card, should either be paid off every month to avoid the breaching of the credit limit, or you should just use them very minimally.

What I find works best for me is that I use primarily one major credit card, which happens to be my favorite one, the airline miles card by United, and when I do get new retail cards, for example I currently have a World Market credit card and an Express credit card, I make absolute certain that I pay those charges off every month so that not only do I not incur additional charges for the interest on these items, but I am also watching that my debt to limit ratio is not reaching anywhere near it’s maximum capacity for credit.

This means that when I do finally go out to get a loan to get a deck put on the back of our house, I won’t need to worry about this aspect, the debt to limit ratio, messing up my chances of getting the loan in the first place, and also of getting a good APR if I do get it.