Category: 

What is a Credit-To-Debit Ratio?

Article Details
  • Written By: wiseGEEK Writer
  • Edited By: O. Wallace
  • Last Modified Date: 05 July 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
  • Print this Article

A credit-to-debit ratio is more commonly called a credit to debt ratio. It is a measurement of revolving credit and utilization of that credit. A ratio is established between the two so that a percentage can be derived. Keeping this percentage below 50% is advised for people who would seek additional credit or things like auto, personal, or home loans. The credit-to-debit ratio should not be confused with the debt to income ratio, which is an additional measure of creditworthiness.

As stated, the credit-to-debit ratio is total of all revolving credit and all use of that credit. For example, a person might have credit cards with a total limit of $4,000 US Dollars (USD). The consumer could owe $2,500 USD or be utilizing that amount of the revolving credit. The credit-to-debit ratio is 4000:2500, and a percentage can be derived by dividing 2,500 by 4,000. In this case, the ratio can be expressed as 62.5%.

Credit analysts suggest that the ratio shouldn’t exceed 50%, as this may signal that a person is overusing their credit and may exhaust it. There are several ways to address this for the consumer with $2,500 charged on credit cards. One method is to open a new account and increase total credit limit. The better method is probably to simply increase payments to creditors and not charge anything new.

Ad

One interesting debate that comes into play when considering credit-to-debit ratio is whether or not a person should close credit cards that are not in use. Some argue this is wise so that the cards don’t present a temptation to charge more things. Others say that closing an inactive card lowers total available credit and may negatively affect credit-to-debit ratio. Therefore it might make sense to keep an inactive card open, simply to maintain a higher available credit amount. It makes less sense to maintain an inactive account if a person must continue paying fees to keep it open.

A credit-to-debt ratio is only one measure of creditworthiness. An equally important measure is the debt to income ratio. This begins with a total of monthly income as compared to how much that income is being utilized. Things like rent, car payments, credit card payments, and any other loan payments are compared against income to see if people have the ability to take on additional debt. Financial experts suggest that the debt to income ratio is best if it is no more than 30%. People who have a debt to income ratio that is higher than 50% may have trouble obtaining loans.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email