DTC: Debt to Credit Ratio in Relation to Home Loans
What is Debt to Credit Ratio?
Your debt-to-credit Ratio (DTC), sometimes known as your credit utilization ratio, is a value that expresses the relation between the amount of credit you have used and your credit limit. DTC is often expressed as a percentage; the higher the percentage, the closer you are to reaching your credit limit. DTC is an important factor in many financial transactions, the most important of which is being one of the factors that helps determine your credit score.
How to Calculate Debt to Credit Ratio
The formula for calculating your DTC is as follows:
Your credit balance (how much you owe) ÷ Your credit limit
The result is then converted into a percentage, and that value is your debt to credit ratio. For example, if you have a credit limit of $10,000, and you have a current balance of $3,500 due, then your debt to credit ratio would be 3,500 ÷ 10,000, which comes out to 0.35. Therefore, after converting that into a percentage, you will see that your debt to credit ratio is 35%.
How DTC Plays a Factor in Your FICO Credit Score
Your FICO credit score plays a HUGE role in determining your eligibility for loans and lines of credit. In today's times, it is nearly impossible to survive without financing something. Whether it is a car, a tuition fee, a medical procedure, any number of smaller purchases, or even buying a home, the average working adult has at least one debt obligation that that comes from a loan or financing.
The amount any person is eligible to borrow or finance is largely dependent on their credit score. Your credit score basically tells lenders and banks how much risk it would be to loan you money. While the exact details of how this all-important number is determined arent widespread, you can be sure that your debt to credit ratio is a large factor.
As a matter of fact, your debt to credit ratio and the total value of your debt obligations accounts for a whopping 30% of your FICO credit score! Needless to say, it is important to not only keep your debt to credit ratio in mind when applying for a loan, line of credit or any other financing, but to also take action to make sure it isn't hurting your credit score.
It is common knowledge that it is good practice to never max out any credit cards that you have. This alone can give your credit a boost. Ideally, you want to try to keep your DTC under 30% for any lines of credit you have open.
If you find that your debt to credit ratio is already high, it is never too late to begin whittling down your credit balance as often as you can. Paying more on each monthly bill, or making payments between cycles (depending on the terms and conditions) can really drive down your DTC in no time.