A person's credit score is a measurement by credit reporting bureaus of the person's relative creditworthiness. This score is important because it will help determine a person's eligibility for loans, as well as the interest rates that he can receive on the loans. A person's credit-to-debt ratio is one of the factors that determine this score.
Credit-to-Debt Ratio
A credit-to-debt ratio is the ratio of a person's total available credit---such as the credit available to him on lines of credit---to the amount of current outstanding debt. According to the Fair Isaac Corporation, which helped formulate the modern credit score, a person's score will generally rise if this ratio is higher, as it means the person is not approaching their debt ceiling.
Credit Score
The exact amount that a high credit-to-debt ratio will raise a person's score depends on a number of different factors, including the rest of the person's credit history. Typically, a person's debt takes up no more than 30 percent of the total amount of credit available to him.
Taking Out New Loans
If a person's credit score is too low, then this can complicate debt management, as the person will not qualify for low interest rates on loans. If a person cannot take out new credit at low interest rates, then it may make it harder for him to pay off his debts, as he will have to make larger monthly interest payments. If he does not pay his debts on time, his score will drop.
Defaulting on Debts
If a person defaults on a debt, he will typically be hit with fees and potentially a higher, punitive interest rate. When this happens on a credit card, the interest rate applied to the person's entire outstanding debt is raised. This means that the person may have greater difficult managing his debts, his interest rates are higher and he may not qualify for new, low-interest loans.
Tags: interest rates, credit score, credit-to-debt ratio, person credit, credit available, interest rate