The debt-to-limit ratio is a simple ratio that compares a consumer’s total credit card balance to total credit card limit. The formula for computing the ratio is shown below:
- Balance = total credit card balance
- Limit = total credit card limit
This ratio is one of the key components used in calculating FICO scores as a measure of risk. Typically, a ratio of under 30% is considered "good."
Suppose in a month your credit card limit is $8,999.00, and suppose in a month you ran up a credit card balance of $2,365.79. What is your current debt-to-limit ratio?
We simply divide the total balance by the total limit. The work is shown below:
Here, after a quick calculation, we see that your current debt-to-limit ratio is 26.29%, which is below the recommended 30% mark. If your ratio were above 30%, you could either limit your spending which would lower the total balance, or you could try to secure a greater credit limit, which would increase your total credit limit and reduce the ratio.