Most consumers know the importance of having a good credit score. Once used primarily by lenders to determine credit risk your credit score is now viewed by insurance companies, landlords and potential employers. If you have a low score you not only reduce your chances of obtaining credit but also send a message to others who see your score. Potential landlords or employers may look at your score and assume if you have difficulty handling your finances you may not be reliable as a tenant or employee. This may be an unfair assumption but it reinforces the fact that having a low credit score will affect many aspects of your life beyond your finances. Understanding how your score is calculated will help you make smart financial choices in the future.

The following information explains your debt to credit ratio which accounts for approximately 1/3 of your credit score.

Debt to credit ratio.

Your debt to credit ratio is determined by taking the amount of debt you owe divided by your available credit. If you have a credit card with a limit of $6,000 and you have a balance of $3,000 your debt to credit ratio would be 50%. If with the same card you carry a balance of $6,000 your debt to credit ratio is now 100% and lenders would consider you a higher risk. You will gain the most benefit from having a debt to credit ratio around 25-30%.

Lower your debt to credit ratio.

As a result of the current economy many people are falling behind on their credit card payments. Credit card companies have responded by lowering credit limits and closing inactive accounts for everyone in an attempt to lower their risk. When your credit limit is lowered on one card your overall “available” credit is reduced. This will cause an increase in your debt to credit ratio. When a credit card account is closed not only is your available credit reduced but you also lose the history of that account. Lenders will still be able to view the history but it will not be calculated into your credit score. There are a few things you can do to lower you debt to credit ratio.

• Show activity on your credit cards. By keeping your cards active you reduce the chances of having the account closed. Disclaimer: increasing your debt may seem counterproductive in lowering your debt to credit ratio; the goal is to show activity on your account but you should do so only if you can afford to pay the balance in full when the statement arrives.

• Request a credit increase. Credit card issuers may not be very flexible in the current economy but it never hurts to ask, especially if you have good history with the issuer or they your credit limit has been reduced through no fault of your own.

• Decrease your debt. This tip is self explanatory. Reducing your debt will lower your debt to credit ratio. Paying off debt is not only good for your credit score but your financial health as well.