Amazingly, most schools don’t teach the most basic elements of credit, debt and budget balancing. Knowing how to handle debt and credit is an important lesson that will determine if you live a successful financial life. The Debt to Credit Ratio is based upon both your revolving and installment loans. It is the percentage of the credit available to you that is used up with debt.
Available Credit is Important to Credit Score
Imagine a bath tub that is empty. It is 0% full. Gradually, you fill it with water. When it is about to overflow onto the bathroom floor, it is 100% full.
Your credit rating is the same way. When you start out, you have “No” credit rating. A financial institution needs to trust in your ability, character and willingness to repay your credit card, car or home before you even appear on the financial radar screen.
Revolving Versus Installment Credit
Credit cards offer “revolving credit,” which gives you an upper credit limit, i.e. $5,000. You can use any amount up to the credit limit. This is called revolving credit because you are allowed to maintain an outstanding balance. This revolving door only closes when you repay the entire balance or fail to repay the debt.
The upper credit card limit determines your “credit available.” Some view it as a rainy day slush fund. Bankers view it as a sign of your financial condition.
Credit Companies Weigh Your Debt Load
Credit scores are based on a number of financial criteria, including the amount of credit available to you in revolving and installment loans. The revolving account loans are weighed more heavily because it shows how you manage credit. The debt to credit ratio is the percentage of the total credit you have used up.
Installment loans include student, car and home loans based on fixed amounts of money. Your debt to credit ratio is always 100% or 1:1 for these types of loans because you always use the maximum amount available for your expenses.
Credit cards are different because the balance is always changing. Let’s say you have a credit limit of $10,000 on one card and $4,000 on another card. You run up a debt balance of $6,000 on the first card and $1,000 on the second card. Your debt to credit ratio in this scenario would be 50% or 1:2. You have used up half of the credit available to you.
Kick the Can Down the Road
Imagine that you had a goose that laid a golden egg every day. With the high prices of gold, you could easily live off the income generated from this productive goose. You would want to keep the goose well-fed and make sure it could continue to produce.
Now, what would happen if you got greedy and demanded more production than the goose could handle? What if you increased the percentage of eggs you expected to be produced by 29.99% every month? Eventually, the goose might get stressed out and fail to reach your productivity goals. It might even produce less due to being too stressed out with your demands.
The Debtor Pays the Banker’s Bills
Bankers view the debtor as the goose that laid the golden egg. Instead of being satisfied with a standard rate of production, banks demand increased production called “compound interest.” Eventually, the productivity demands are too much and people can’t pay.
Debtors pay the banker’s bills. A wise banker wants debtors to have manageable debt levels.
Maxed Out Credit
Capitalism requires a surplus to function properly. This surplus can be re-invested into new businesses, which produce goods and services. Without a surplus, the system fails.
Bankers try to determine whether you can “handle your debt payments responsibly.” When you have maxed out your credit cards, it is a “red flag” to bankers. It makes you look irresponsible, financially stressed or in trouble. Bankers may reject a new loan request or charge higher interest rates if you have a high unmanageable debt load. Experts recommend usage of only one-third of available credit.
New Loans Not Available
Once you have passed the point of no return, no banker will give you a new loan. You need to work with debt negotiation professionals to establish a manageable payment level. The goose that lays the golden egg must be allowed to produce a reasonable amount. Debt relief re-balances economic well-being so that you can handle your payments and have peace of mind.
Get your bills settled with NationalRelief.com. You will be more healthy physically and financially. Debt relief is the credible answer to your debt problems. Talk to a debt professional today.
National Debt Relief helps people nationwide resolve $10k or more in unsecured debt. Our debt coaches negotiate with creditors on your behalf so that you pay a fraction of what you owe and can become debt free in as little as 24-48 months.
