Maximum debt limit ratio
The ratio of debt limits often referred to as the debt rate limit or use of debt compares your current debt against your maximum available credit. As a percentage, your use of debt represents your creditors ‘ dependence on potential creditors when considering whether or not to give you additional debts.
Basic concepts of debt limits
Your debt limit is the maximum number of debts you can take on an individual or a business. Individual debt limits generally refer to credit available to you through personal credit limits and credit cards. For example, if you have a personal credit limit with a limit of 15,000 dollars and 3 credit cards with a total limit of $30,000, then your debt limit is 45,000 dollars.
Calculate the use of debt
The use of debt, or the percentage of your debt limit, is calculated by taking the total available debt that is in use and dividing your debt limit. If you are currently using 4,000 dollars of personal credit limit and 5,000 dollars within the available credit limit indicated above, your debt limit rate is 9,000 dollars divided by 45,000 dollars. This is the fifth of your available debt usage or 20 percent debt limit ratio.
Technically, you can reach the debt limit rate of 100 percent. If you use all of the 45,000 dollars of the available debts, you have expired your debt and have to pay your balance or receive additional credits to reduce your rate. In fact, the debt limit below 30 percent is considered “very good” and helps you gain stronger credits, according to SavingAdvice.com.
Credit score Effects
The use of your debt by the credit reporting agencies and creditors view is an indication that your risk is a potential borrower. Some people with a higher percentage of debt limits are considered dependent on more debt and greater risks to new debts. Your debt limit rate accounts for 30 percent of credit points, with credit history being the only factor contributing more to your scores. Therefore, maintaining the percentage of the debt limit below 30% is a wise financial goal. Keeping the ratio of debt limits on individual credit accounts of less than 30 percent, or at most 50 percent, is also a good idea.