Does the balance-to-limit ratio apply to installment loans, such as student loans or auto loans?
The balance-to-limit ratio is peculiar only to revolving accounts, such as credit cards. Although a credit card has a set limit, you are the only one who decides what happens on your credit card. Either you build your score or you build charges.
Your utilization ratio also is known as a balance to limit ratio. This is gotten if you divide your total credit card balance by your total credit card limit. If your utilization ratio is high, that means you are at credit risk. The lower your balance to limit ratio, the better your credit score.
Balance-to-Limit Ratio Compared to Debt-to-Income Ratio:
Balance-to-Limit Ratio is not typical of a student loan or auto loan generally called installment loan. With an installment loan, you have a specific amount to repay but not at once. Installment loans allow you to pay a given amount of the money each month. How the account is managed is none of your concern.
As you continue to make your set monthly payment with an installment loan, you are paying down your debt as well as building your score.
Unlike the balance-to-limit- ratio, installment loan factors into the debt-to-income ratio. It is used in mortgages and several other credit transactions.
The debt-to-income ratio compares your monthly payment to your monthly income. Lenders also consider this before approving or disapproving your application.
To know what your debt-to-income ratio is, sum up your monthly payment and divide the sum by your monthly income. Make sure your tax is not deducted before your calculation. The ratio should be less than 35% with your monthly mortgage and 20% or even less without your monthly mortgage payment.
Using Experian’s free Financial Profile, you will know what lenders consider. It provides your credit score, calculates your debt-to-income ratio and other necessary details using the information you provide. With it, your success rate is high.
Your Debt-to-Income Ratio Might Also be Calculated:
Your Debt-to-Income Ratio is usually provided at the completion of your application specifically to help lenders take a decision. Because is not part of a credit report, a credit score doesn’t consider it. Always keep your debt-to-income ratio low, it shows you aren’t abusing credit.
Whether credit score considers the debt-to-income ratio or not, it does factor in the installment debt and should be taken seriously.