Your FICO credit score is made up of five main components and each one carries a specific amount of weight within the total score.
How you’ve dealt with debt and made payments in the past accounts for 35% of your score. The number and amount of new credit accounts you’ve opened as well as the different types of debt you have (credit cards, student loans, auto loans, etc.) combine to make up 10% of your score. The length of your credit history accounts for 15% of your credit score.
Finally, your debt-to-credit ratio and how much debt you carry together account for 30% of your FICO score. All of this means that you might want to maxing out your credit limit. It’s best to have as low a credit utilization ratio as possible. In short, a high debt-to-credit ratio can mess up (aka drive down) your credit score.
The formula for calculating your credit utilization ratio is pretty straightforward. To figure it out for an individual card, divide your credit card balance by your available credit line. If you’ve only got one credit card and you’ve spent $400 out of a possible $2,000 this month, your debt-to-credit ratio is 20%.
But say you have three credit cards with credit lines of $1,000, $3,500 and $5,000. You can find your overall credit utilization by first adding those numbers. Then, divide your total balance across all three cards by the sum of your credit limits. If you’ve spent $200 on each, your debt-to-credit ratio would be about 6% ($600 divided by $9,500).
The ideal debt-to-credit ratio for credit cards? suggested by FICO is a debt-to-credit ratio percentage below 30%. And that goes for your ratio on any one of your cards separately as well as for your overall ratio.
Lenders, including mortgage lenders, use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.
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