Debt is a common problem for Americans, who frequently carry balances on credits cards and have car loans and mortgages. While the overall amount of debt an individual carries is important, lenders closely watch an individual's credit-to-debt ratio, which is a significant factor in calculating the credit score.
Defined
The credit-to-debt ratio indicates the amount of used debt compared to the total amount of credit an individual can use. For example, an individual with total outstanding debt of $2,400 and available credit of $7,500 has a credit-to-debt ratio of 32 percent.
Function
Lenders often look at this figure to determine how well an individual manages debt. While no single standard exists for this ratio, having a credit-to-debt ratio of less than 50 percent may be more positive for individuals.
Considerations
Another important calculation is the income-to-debt ratio. This formula compares outstanding debt to the individual's gross income. For example, annual income of $19,500 and debt of $2,400 is a ratio of 12 percent. This can help make the credit-to-debt ratio look better if an individual has a high income.
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