How can I reduce my balance-to credit limit ratio when I can’t make large payments?

Your Debt-to-Available-Credit ratio accounts for 30% of your credit score. Most credit experts suggest keeping this ratio below 50% (if you have a $ 1000 credit limit, don’t carry more than a $ 500 balance). The lower the debt, the better (on many levels).

I’ve heard of people asking their credit card company to raise their credit limit in an effort to lower their DTAC ratio. However, this is “squeezing the balloon from the wrong end” in my opinion. The best option to is to pay down the debt.

One way to do this is to pick the account with the highest interest and pay more on that one account while maintaining the minimum monthly payments on all other accounts. This will excellerate that account’s payoff. Once paid off, apply the amount you were paying to that account to the next highest interest account (in addition to its minimum monthly payment). Continue this process until all debts are paid (and be sure not to add new credit card debt while trying to pay off old credit card debt).

If you are finding it difficult to pay extra, then you may need to establish a budget with the goal of discovering ways to free some of your money in your cash flow for paying down your debt. If you are a student, this can be difficult, but it is worth the effort.

Your Debt-to-Income ratio is not a factor in your credit score. Income is usually not reported to the Credit Bureaus (Credit Reporting Agencies: Equifax, Experian and TransUnion), so it has no direct impact on credit scores.

The five major factors of a credit score (FICO Score) are:

1. Payment History (35%)

If you never pay late and you pay more than the minimum, this portion of your credit file will reflect positively on your credit score. If you pay late, it will reflect negatively and bring your score down.

2. Amounts Owed (30%)

It is a misconception that a person’s Debt-to-Income Ratio has an impact on their credit score. Instead, the Debt-to-Available-Credit Ratio is what impacts credit scores. This is how much you owe versus how much available credit you have. For example, if you have a credit card with a $ 1000 credit limit and you charge up $ 800, it will not reflect as well as if you only have a $ 200 balance. Most experts suggest keeping your DTAC Ratio below 50%.

3. Length of Credit History (15%)

Are you new to the economy, or have you been here for a while? However, this is not the age of your credit file, but the age of your the credit accounts on your credit file. This is why experts always suggest that you keep your oldest credit account open, even if you do not use it.

4. New Credit (10%)

How well do you plan your credit consumption? If you open accounts sporadically, this may reflect negatively. However, if numerous credit inquiries appear in your file because you are shopping for credit within a short time period, this should not reflect negatively. Creditors like to see if you plan your credit usage.

5. Types of Credit Used (10%)

Do you have a variety of credit account types? Do you have too many credit card accounts and no other type of account? Do you have a well-balanced credit profile? These are factors in your credit score.

Beyond FICO…

While your Debt-to-Income Ratio is not part of your FICO Score, it may be a factor when you apply for credit to purchase a big-ticket item, like a home, car or large appliance or furniture. In this situation, the lender will review your FICO Score along with your DTI Ratio to determine your credit risk factor (and your interest rate and terms).

While income may have an impact on a person’s ability to pay bills on time (paying late will lower his or her credit score), a person’s income does not directly impact his or her credit score.