Understanding the debt-to-credit ratio of consumer debt

Many Mississippi residents already know that their financial outlook would be brighter without certain debts. Burdens like student loans, auto and home loans and credit card debt can come together to paint a picture of overwhelming debt. Still, while many know that they must pay down debt in order to secure a more stable position, the question is often how, to tackle that debt in a way that helps rather than harms one's credit.

Credit scores are often something of a mystery to residents, as it seems there is so much confliction information about how they are calculated and what are considered positive versus negative influences. It's helpful to know that credit card debt is not considered the same as auto and mortgage debt. Revolving debt, the type found with credit cards, is a different category than car and home loan debt. Having lots of revolving debt, such as credit cards are at or above their limits, can very negatively impact one's credit score.

Fortunately, there is a specific way to start paying back one's creditors that helps improve a credit score. Lowering the debt-to-credit ratio is the overall goal. A high debt-to-credit ratio shows creditors that a person is possibly encountering some major financial challenges and has little room to meet their obligations. A low ratio, on the other hand, demonstrates that there is space available for handling more debt if need be. Essentially, consumers want to lower that ratio, and one way to do it is by reviewing the individual debt-to-credit ratio of each credit card.

People with multiple cards often have cards with higher debt-to-credit ratios than others. Paying down these cards first helps with the broader ratio. A person doesn't even have to pay-off that card completely to help their score. A positive debt-to-credit ratio is considered to be around 30 percent, so reaching that level with the highest-ratio card, and then moving on to the card with the next-highest ratio could be a sensible plan.

Of course, sometimes debt versus income and expenses is the root of the problem, and filing for bankruptcy may be the most realistic option. Bankruptcy either eliminates debts or allows debtors to repay them in a structured, affordable manner.

If one's credit card debt is combined with other debts to form an insurmountable challenge, speaking with a professional may prove the most direct solution to those financial challenges. This will allow them to become more knowledgeable about the process so they can keep their best interests in mind while also protecting their rights.

Source: DailyFinance, "How to pay down credit cards to boost your credit score," Abby Hayes, May 13, 2014

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