What Is Debt to Credit Ratio and How to Calculate?

It is widely known that credit cards can make shopping a breeze, but if you’re not cautious that breeze can turn into a wind storm of debt that carries exorbitant interest rates. What is often not so widely known is that how much you charge on those cards, even if you pay the full amount due each month, can affect your credit score. Specifically, how close your charges get to the credit limit on a card can compromise your credit score. Here’s what you need to know about that dynamic.

Work with a financial advisor to h elp you see how utilizing credit works with your overall financial plan.

The Meaning Behind Your Credit Utilization Ratio

Whether the credit line for your credit card is $2,000 or $10,000, that number wasn’t made up out of thin air. When you applied for the card, your lender likely looked at your financial background and assigned you a credit limit based on your income, your credit score, bankruptcy risk and your debt-to-income ratio (your total monthly debt payments relative to your income).

However it was decided, your credit limit is an important number to know. If you “max out” your credit card this means you spend up to the limit. When this happens, you will likely see the impact on your credit score.

Your credit utilization ratio is the percentage of your available credit that you are using (your credit card debt divided by your credit limit). You might be under the impression that you’re free to spend up to the limit without experiencing any adverse effects. We hear you saying, “My credit card issuer said I can spend up to $6,000. It’s OK if I max out my card this month, making student loan payments or taking care of the mortgage loan on my house…right?” Nope.

Your credit utilization ratio (also known as your debt-to-credit ratio or your balance-to-limit ratio) is one of the factors used to compute your credit score. A higher ratio means a lower credit score.

How Your Debt-to-Credit Ratio Affects Your Credit Score

Customer uses a credit card to make a purchase.

Your FICO® credit score is made up of five main components and each one carries a specific weight within the total score. How you’ve dealt with debt and made payments in the past accounts for 35% of your score. The number and amount of new credit accounts you’ve opened as well as the different types of debt you have (credit cards, student loans, auto loans, etc.) each make up 10% of your score. The length of your credit history accounts for 15% of your credit score.

Finally, your debt-to-credit ratio and how much debt you carry together account for 30% of your FICO® score. All of this means that you might want to steer clear of your credit limit. It’s best to have as low a credit utilization ratio as possible. In short, a high debt-to-credit ratio can drive down your credit score.

Note that the FICO® scoring model calculates two different credit use ratios. One is based on your debt-to-credit ratio for each credit card in your wallet. The other adds all of these numbers together to show you how much you’ve spent in total relative to all of your credit lines.

Credit cards in particular matter to the three credit reporting bureaus. Other forms of debt that you might hold won’t have the same impact on your credit score. Since credit cards allow you to carry revolving balances that don’t need to be paid in full each month, credit cards carry more weight in the “amounts owed” section of your credit score than do debts from other loans.

How to Calculate Your Debt-to-Credit Ratio

The formula for calculating your credit utilization ratio is pretty straightforward. To figure it out for an individual card, divide your credit card balance by your available credit line. If you’ve only got one credit card and you’ve spent $400 out of a possible $2,000 this month, your debt-to-credit ratio is 20%.

But say you have three credit cards with credit lines of $1,000, $3,500 and $5,000. You can find your overall credit utilization by first adding those numbers. Then, divide your total balance across all three cards by the sum of your credit limits. If you have a $200 balance on each, your debt-to-credit ratio would be a little over 6% ($600 divided by $9,500).

What’s the ideal debt-to-credit ratio for credit cards? FICO® suggests that a good debt-to-credit ratio percentage is below 30%. And that goes for your ratio on any one of your cards separately as well as for your overall ratio.

How to Lower Your Credit Utilization Ratio

There are several steps you can take to keep your utilization ratio low and credit score in tip-top shape. It’s best to keep an eye on your credit card balances so that you’re not racking up too much debt. Your credit card issuer may be able to send you mobile alerts whenever your balances rise too high.

You might also want to try raising your total credit limit by requesting a credit line increase. This could be worth considering if you’re having a hard time keeping your utilization ratio under 30%. But increasing your credit line could cause your credit score to dip, especially if you spend too much money and you can’t pay your credit card bills.

Tips to Help You Lower Your Credit Utilization Ratio

Lowering your credit utilization ratio is one of the fastest ways to improve your credit health, since this metric plays a major role in determining your credit score. A lower ratio signals to lenders that you manage credit responsibly and aren’t overly reliant on borrowed funds. If your utilization is higher than you’d like, a few intentional changes can help you bring it down and strengthen your financial profile.

Pay down your existing balances: Reducing the amount you owe on revolving accounts immediately lowers your utilization ratio. Even small extra payments toward your credit card balances can make a noticeable difference. If you can, prioritize paying down cards with the highest balances relative to their limits.
Increase your credit limits: Requesting a higher credit limit, without increasing your spending, can improve your utilization ratio by expanding the amount of available credit. Many issuers allow you to request a limit increase online, especially if your income or credit score has improved. Just be sure not to use the higher limit as an excuse to accumulate more debt.
Spread balances across multiple cards: If one card is carrying a high balance, moving part of it to another card with a lower balance or more available credit can help balance out your utilization. This doesn’t reduce your total debt, but it can lower your utilization on individual cards, which credit scoring models also consider. A balance transfer card with a low or 0% introductory APR may make this strategy more cost-effective.

Lowering your credit utilization ratio is one of the most practical steps you can take to strengthen your credit score and improve your overall financial standing. Whether you’re paying down balances, raising limits or strategically spreading out debt, consistency is key. If you’re unsure which approach fits your situation best, a financial advisor can help you create a plan that protects your credit and supports your long-term financial goals.

Bottom Line

Man uses his credit card to make an online purchase.

Just because you can spend a certain amount with your credit card doesn’t mean that you should. In fact, it’s a good idea to stay well below a 30% debt-to-credit ratio so your credit score doesn’t take a hit that’ll keep you from buying a house or refinancing an existing one. The lower your credit utilization ratio, the better. In addition to keeping your spending in check, you can also lower your credit utilization ratio by increasing your credit limit.

Tips for Borrowing Money

If you’re thinking about borrowing money but aren’t sure how to make your credit work for you, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Credit cards come in all forms with different benefits and different costs. Consider using our tool to help you find the right credit card for your situation.
Remember that you won’t have to pay any interest if you pay your credit card bill in full by its due date. So the best way to save on interest is by never carrying a balance. Emergencies happen though. If you do carry a balance, the amount that you pay in interest will depend on your card’s APR and your total balance. That means you can help yourself by choosing a credit card with a low APR.