Monday, July 11, 2005

Debt-to-Credit Limit Ratios

I thought I was being real smart when I transferred my car loan to my credit card. My logic was that I would be shaving off about 1% interest on $14,000 over a 2 year period which would save me about $280. What I didn't plan on was that this would screw up my FICO score. Your FICO score is basically a rating of your credit and determines what kind of interest rate you will get when you apply for a loan. If you have a high FICO score (720-850) you will get the best rates available whereas if you have a low FICO score (500-589) you're probably going to pay up the wazoo in interest.

Part of your score is calculated by determining what your debt-to-credit limit ratio is. This is the combined amount of debt you owe on credit cards in relation to your total credit limits. Notice that it only combines credit card totals and not your total debt (excludes student loans, car loans, home loans).

For example, before I transferred my car loan to my credit card I had a total credit card debt of about $10,000 and a credit limit of $23,700 which gave me a debt-to-credit limit ratio of about 42%. Once I transferred my car loan to my credit card to take advantage of the lower interest rate my credit card debt shot up to $22,000 and my ratio soared to 93%.

All of a sudden the bank saw me as a threat. My interest rate shot up to 22% but thank god my interest rates for any balance that I carried was locked in for the life of the loan. I was baffled that they would raise my interest rate so high considering I had not acquired any new debt (just moved it around), I had never been late on a payment, and was steadily paying 2-3 times my minimum every month. Even after whiddling my ratio down to 73% those bastards won't lower my interest rate to anything less than 21%. Its probably all for the best though because its a great deterrant to accumulating any new debt.

One way to off set the high debt-to-credit limit ratio is to simply ask them to raise your credit limit. My credit card company is retarded and they won't let me raise my credit limit either but perhaps it will work for you!

Did you notice? I made another payment bringing my debt to a measley $17,436.31. Yeah!

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Wendy said...

I would highly recommend reading Davd Ramsey's The Total Money Makeover.

Rinjur said...

Ya credit can be quite an interesting thing. You definately have to watch out with where you have your credit!

Leanne said...

I have been reading all your posts and can completely understand how you are feeling. I started out last January with over $25,000 in debt, and am now down to just under $11,000. Congratulations on your progress, I look forward to reading more. :)

symbiotiq said...

Transfering anything to a credit card company can be risky. Are you safe if you do make a late payment? Won't the higher interest be applied to your previous balance also. Also recommend Dave Ramsey. His stuff is not new and improved, it's the old solid stuff that really works. He makes it simple, and he's so passionate you have to listen. said...

congrats on you payments!!! debt to credit ratios is some fun stuff let me tell you.. i was an underwriter for a year and the credit report was my best friend... if you can get your ratio down to fifteen percent or lower then you are considered a non-risk and the perfect credit applicant. i am so working on this! atleast i am down to the fifty perfect or so mark now.

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