One of the many areas of a credit score that people often overlook is the debt ratio element That is involved. Some people are not even aware of its existence. The key thing is that it does exist and is considered to make up 30% of your overall credit score and is another key element to focus on if doing any sort of credit repair.
The most important part is the payment history which involves ensuring that all your accounts are paid on time and up to date without having late payments reported in this section. To improve our credit scores any of us can pay our bills on time and set a trend in this area where a lender can see that we can be trusted to pay the bills on time and within a given time frame. It is the first thing a lender will look at. The next part that a lender will look at is the debt ratio element contained within a credit report as it makes up 30% of your credit score.
The purpose of the debt ratio is to give both yourself and any lenders checking your financial details about other accounts, is to see how you are looking overall as far as finances go. It is a step that involves taking all the amounts of credit you have available across a variety of accounts (excluding mortgages) and measuring that against the amount of overall debt that you owe out.
A simple example is shown below:
A person has 10 credit accounts all with a $1000 credit limit giving them a total of $10’000 credit available. On these accounts each has a $100 outstanding balance. The total debt owed becomes $100 x 10 (amount of accounts) totaling $1000
Using the example above is what a debt ratio tells any lenders looking into you financial background. Your credit report details this information in a percentage format. Based on the above example the debt ratio would be 10%. This is an easy way for people to read your financial credentials without having to go through all the information and work this out for theirselves.
The example shown above would be a good debt ratio to be shown on someones credit report as it will show that a person has got credit available to them but are managing their accounts to be able to make the repayments in a timely manner rather than going on a spending spree and using all the credit they have available to them to the limit and then applying for more. This is poor debt management and something that a lender will try to avoid in applicants. They want to be approving someone for the product that is going to be used responsibly.
The debt ratio element within a credit report is where the lender will get this information.
ABOUT THE AUTHOUR:
Bob Bowman is the author of many finance related articles and enjoys sharing his knowledge ac
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