Many important numbers are expressed as ratios when it comes to personal financing matrics. However, you may have heard about two common ratios: debt to credit and debt to income. You can easily get confused with the two, as they sound alike. The following provides some information on the difference between the two.
Debt to Credit Ratio
Debt to equity ratio, also known as credit utilization, has a lot to do with revolving credit debts, such as credit cards. Additionally, there is a credit portion for this ratio. You get a specific limit on credit cards. When you spend using your credit card, your information on expenditure goes to the credit card company. This amount or the portion is the debt to credit ratio for you.
Suppose you own $100 on a card with a limit of $1,000. You have a debt to credit ratio of 10%. This is the way of expressing in terms of percentage. Each credit card has a debt to credit ratio. You can also have an over-reaching ratio that takes into account all the credit limits.
Uses of Debt to Credit Ratio
Your FICO score is directly affected by the debt to credit ratio. About 30% of the score is made by ‘credit utilization’. It can be further broken into things like Debt owned on
- Installment loans
- Total debt owed to lenders.
- Number of accounts with outstanding debt
- The amount of money you own in your accounts.
Similarly, the ideal debt to credit ratio is 0%. It means that you never carry a balance on your revolving accounts. However, you can have a large impact on your FICO score, even if you begin your score from 50% to 25%.
What is Debt to Income Ratio?
Your debt to income ratio does not affect the FICO score. However, it may affect your ability to borrow. This is the reason that the lenders depend on your ability to hold the funds. Uniquely, it decides how much mortgage you can effort.
By the use of this ratio, you can understand the total monthly minimum debt payments. If you pay a total of $1,500 in monthly payments for your student’s loan, car payment, and credit cards, your debt to income ratio is 30%.
Uses of Debt to Income Ratio
It has already been discussed that your debt to income ratio doesn’t count for your credit score. It is never considered for credit score or a credit report. But the lender will always consider credit score before lending you money, especially for a home loan.
A lender will always calculate your debt to income ratio. This helps them to understand whether you qualify for the loan or not.
What it Means
What do these ratios mean to you and your life? They all mean to find little monthly debts or payments you have. It also means how much you have regarding your income and credit limits. Therefore, keeping both these ratios as low as possible is a good way to keep a healthy credit score.
