Credit Reports and Debt Level

Did you know that your credit reports and your debt level are tied together in many ways? Many consumers do not realize how the amount of debt that they carry affects their credit reports, which, in turn, affects their credit score. Here are some insights into how this relationship works.

The first thing consumers should understand is that all debt that is reported to the credit bureaus will be added together in order to get to a total. This includes auto loans, home loans, credit card balances, department store tabs, etc. The second thing to understand is that the only weapon consumers have to offset debt is income. This is why it is important to make sure that you list all sources of income when you apply for a loan.

Once the agencies have your debt level and your income level they use that information to calculate various ratios. One of the most important and most often used ratios is the debt-to-income formula. This ratio, as the name suggests, shows the relationship between the amount of money that you currently owe, to the amount of money that you have each month to spend.

Basic math tells us that if your debt goes up, perhaps through the use of a credit card purchase, and you income stays the same, which is common for most households, the result is not in your favor. On the other hand, if income goes up and debt stays the same or decreases because of payments made, the result is in your favor.

There are many more factors used when determining your credit score, but the debt-to-income ratio is one of the most influential. The more you can decrease your debt the better your credit score will be. Better, in this case, means a higher score. Conversely, the more debt that you carry the lower your score will be.

Another ratio that is used is called available credit-to-debt. This formula takes into account the amount of credit that you are eligible for according to the information on your credit reports. This would include such things as the credit limits you have on your various credit cards. The limits you have on department store cards or gasoline credit cards and other types of revolving credit. The higher your available credit is when compared with your current debt, the better.

The last issue that most consumers should understand when it comes to credit reports and debt levels has to do with payment history. Credit reports can be seen as historical documents in that lenders can track the behavior of a consumer over time. If lenders see that a consumer has added a lot of debt and then see that late payments begin to happen, well, that is often seen as a red flag to them and they will assume that the consumer has reached the upper limit of sustainable debt. For this reason, consumers should try to keep debt low and make sure that all payments are sent in on time.

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