For many of us, we didn’t learn the importance of managing our credit while growing up. Even fewer of us were taught how to grow our credit. Unfortunately, by the time we figure it out, we’re usually in the stage of bad credit, and trying to rectify the damage from the choices we’ve made.
Normally we’re not taught about credit utilization ratio, or the ratio we need to keep our credit at. So this will be a quick lesson to explain credit utilization.
- Credit utilization should always be no higher than 30% of the card limit. Anything higher than 30% will result in a negative hit to your credit.
To understand your debt to income ratio when looking to buy a house or car, here is an easy way to figure it out:
Let’s assume your annual income is $60,000
Divide $60,000 by 12 to find your monthly income ($60,000/12 = $5,000)
Your monthly income is $5,000
You spend $500 monthly on a car loan, $1,000 for your new mortgage and $550 for your other debt obligations, which totals $2,050 in monthly debt and expenses
Take that $2,050 and divide it by $5,000 (monthly debt divided by monthly income)
$2,050/$5,000 = 41 percent debt-to-income ratio
For those of you who may find yourself in the position where you need to rebuild/repair your credit, please know that it can be done!