An essential aspect of credit health that often gets overlooked is the debt-to-credit ratio. It plays a vital role in determining your creditworthiness. So, let us delve into the details of this crucial metric, shedding light on what it means, how it impacts your credit score, and how managing it effectively can be a game-changer for your financial well-being.
Understand debt-to-credit importance and its impact
The debt-to-credit ratio, also known as the credit utilisation ratio, is a percentage that represents the amount of credit you are currently using compared to your overall available credit. In simpler terms, it is the proportion of debt you owe to the total credit limit extended to you. This ratio is an essential indicator of your financial discipline and is closely scrutinised by lenders, especially when you apply for new credit facilities.
Understanding the impact on your credit score
Your credit score is a numerical reflection of your creditworthiness. It is determined by several factors, and the debt-to-credit ratio is a significant one among them, accounting for 30% of your credit score. A high debt-to-credit ratio, meaning you are using a significant portion of your available credit, can negatively affect your credit score.
Why is your debt-to-credit ratio important?
Maintaining a low debt-to-credit ratio is vital for several reasons:
- Positive impact on credit score: Keeping your credit utilisation low indicates responsible credit management, resulting in a positive impact on your credit score.
- Higher credit limits: A good debt-to-credit ratio may lead to an increase in your credit limits over time, enabling you to access more credit when needed.
- Attractive to lenders: Lenders view borrowers with a low debt-to-credit ratio as less risky and more likely to repay their debts on time, making you an attractive prospect for loans and credit cards.
Calculating the debt-to-credit ratio
To calculate your debt-to-credit ratio, divide your total outstanding credit card balances and loans by the total credit limit available to you. For instance, if you have a credit card with a limit of Rs. 1,00,000, and you owe Rs. 45,000, your debt-to-credit ratio would be 45%.
Ideal debt-to-credit ratio
As a rule of thumb, it is advisable to maintain a debt-to-credit ratio of 30% or lower. This ratio shows that you are using credit responsibly and not overextending your borrowing capacity.
Tips to improve debt-to-credit ratio
Here are some actionable tips to improve your debt-to-credit ratio:
- Pay down outstanding balances: Aim to pay off high-interest debts and credit card balances to reduce your overall debt.
- Avoid closing old credit accounts: Closing old credit accounts may reduce your available credit limit, potentially increasing your debt-to-credit ratio.
- Request credit limit increases: If you have a good credit history, consider requesting a credit limit increase on your existing credit cards to lower your debt-to-credit ratio.
- Limit new credit applications: Frequent credit applications can indicate financial distress, which might negatively impact your credit score and debt-to-credit ratio.
Building and maintaining a good credit score can be challenging, but with the Bajaj Finserv Credit Pass, the process becomes more manageable. Your personalised Credit Pass dashboard allows you to track your Credit Health Report in real time and monitor credit factors like your debt-to-credit ratio, empowering you to make informed decisions to improve your credit score.
Understanding the significance of your debt-to-credit ratio is crucial for maintaining a healthy credit score. A low debt-to-credit ratio indicates responsible credit management and can significantly impact your creditworthiness. By following the tips mentioned above and utilising resources like the Bajaj Finserv Credit Pass, you can build and maintain a good credit score, opening doors to better financial opportunities. Remember, it is not just about managing your debts; it is about securing your financial future.
