The debt-to-income ratio (DTI) is the amount of debt you have--such as a car loan, credit cards, or mortgage--compared with your income. Lenders look at DTI when making lending decisions. They measure your debt load based on the outstanding debt that appears on your credit report, and this debt load helps determine how high or low your credit score is.
History
In 1989, Fair Isaac created the FICO scoring model in partnership with Equifax. Originally, the credit score carried the name BEACON, which is a trademark of Equifax. FICO is the score lenders use most, according to Fair Isaac.
Significance
According to Fair Isaac, 30 percent of a FICO score is based upon the amount of debt a consumer has relative to the amount of available credit. Outstanding debt impacts not only the FICO score but also constitutes the debt portion of the DTI that lenders look at when making loan decisions.
Prevention/Solution
FICO suggests that consumers keep balances low on revolving credit, such as credit cards and store charge cards. By paying the balance off completely each month, consumers can avoid accumulating a balance and keep their debt obligations low.
Considerations
Having several credit cards with small balances on each can help increase a credit score; having one credit card with a huge balance can lower it. This is something to consider when deciding whether to do multiple balance transfers onto one card.
Warning
If a consumer exceeds a credit limit, such as maxing out a credit card, FICO looks at this negatively, and it will lower the credit score. Exceeding a credit limit is considered risky behavior and indicates that you are having a hard time meeting your financial obligations.
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