A debt-to-credit ratio is a measure of the amount of debt you owe compared to the total of your credit limits on revolving credit accounts. Revolving credit includes credit cards and lines of credit. Debt-to-credit ratio is another way of saying credit utilization.
Here’s an example of a debt-to-credit ratio calculation.
Let's say that you have two credit cards. Card A has a $5,000 credit limit and Card B has a $10,000 credit limit. You have a $1,000 balance on Card A and owe $2,000 on Card B. In this case, your total debt is $3,000 and your overall credit limit is $15,000, which means you have a debt-to-credit ratio of 20%.
Ideally, your debt-to-credit ratio should be 30% or lower. When potential lenders review your application for a loan or line of credit, too much debt can signal an inability to meet expense obligations. Additionally, the amount of your credit that you end up using has a big impact on your credit score. You can learn more from our guide to improving credit utilization.