Understanding How Credit Cards And Your Debt-To-Income Ratio Affect Your Credit
Credit Cards and Your Debt-To-Income Ratio
Everybody has something called a debt-to-income ratio. When you're born, it's 0. You have no debt and no income. When you're a kid working a part-time job, it's also zero (unless you owe money to mom or dad). How so? Read on...
Understanding Your Debt-To-Income Ratio
Your debt-to-income ratio is the amount of your debt in comparison to the amount of your income. If your income is $2,000 a month and you have $500 in debt payments each month, your debt-to-income ratio is 25-percent. On the other hand, if your monthly debt payments are $1,000 and your income is still $2,000, your debt-to-income ratio is 50-percent.
How Credit Cards Affect Your Debt-to-Income Ratio
The more credit cards you have and the higher the balances on them, the more debt your credit report is going to show. This is going to make your debt-to-income ratio go up, which will make your creditworthiness go down.
How High Is Too High?
If your debt-to-income ratio remains below 30-percent, you're in pretty good shape. If it goes higher than that, you're starting to tread a fine line. Anything above 50-percent and you're a walking shipwreck.
Keeping Your Debt-to-Income Ratio in Check
It's important to keep your debt-to-income ratio in check. If you don't you might not be able to finance a house or a car when you need to.
If you want to keep your debt-to-income ratio in check, you have to keep your credit card balances and other monthly debt payments to a minimum. The less your debt, the lower your debt-to-income ratio will be and the better your credit will appear to lenders.