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How debt to credit limit ratios impact credit ratings

| Jul 25, 2013 | Credit Card Debt |

Wisconsin residents who seek to improve their credit rating often focus on making sure they send in payments on time, but many do not realize that keeping their balances low is also important. Many people assume that as long as they are making on-time payments, they can rack up as much credit card debt as their balances will allow. However, keeping large balances on credit cards may prevent someone’s credit score from improving or even lower it.

Some people believe that maintaining a high balance on their credit card will have no impact on their credit score and lead to an increase in their available credit line. Doing so may lead to increasing someone’s available credit, but it is just as likely to end up reducing their available credit. Additionally, keeping balances at or near a card’s limit can raise someone’s debt to credit limit ratio, which is a number that should be kept low if at all possible.

A debt to credit limit ratio is the amount of debt people have compared to the total amount of credit available to them. It is recommended that people keep their ratio at or below 30 percent, and those with the best FICO scores have an average of seven percent. If someone has a solid payment history but is not seeing an improvement on their credit rating, it may be due to a high debt to credit limit ratio.

Managing debt is an important part of maintaining a good credit score, but if people’s debt is beyond their ability to repay, filing for bankruptcy could help them regain control of their finances. A lawyer could explain how bankruptcy might be able to help a client and assist them with filing.

Source: Main Street, “analyze your debt to credit limit ratio”, Deepa Venkatraghvan, July 15, 2013

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