Balancing Your Debt to Credit Ratio

by Allison Jaffe 10/06/2019

It's easy to get stuck without a mortgage approval or with a smaller home loan than you want, just because you don't understand how your credit score works. Most of the things you've done to prepare: budgeting your income, balancing your bank accounts and saving up for a down payment, aren't reflected in your FICO credit score. It doesn't even show how much you can afford.

So what’s the point of your credit score?

It tells your lender what you’ve done with your previous credit. Whether anyone has been willing to lend you money, how long you’ve kept it and whether you pay it back on time. They keep the actual algorithm at FICO secret, but there are two main factors that you can affect.

Late Payments

These are easy to understand and fix. Ready? Pay them on time. That’s it. Each time you are late on a debt payment, whether it’s a credit card, school loan, mortgage, or car loan it dings your credit score. That’s the easy part. Now for some finance math.

Debt to Credit Ratio

Surprisingly, you are in complete control of this part of your score too. While it sounds like this is a ratio of how much you owe to how much you make, it's not. The debt-to-credit ratio shows how much you owe based on how much credit you currently have available. That means if you have a $5000 credit card, and your friend has a $2000 credit card, and you both OWE $2000, you will have a higher score than your friend because your ratio ($2000/$5000) is lower than hers ($2000/$2000). The higher this ratio gets, the less likely lenders are to give you more credit. Most professionals suggest you try to keep your usage below 30%. That means your balance on that $5000 credit card should stay below $1500. This practice works better for you as well, keeping some cushion in your accounts for emergencies.

Managing your Debt-to-Credit Ratio

There are a few tricks beyond merely using less of your credit to help keep this number under control. First off, pay off as much of your debt as possible. You want to keep that used debt down as low as possible when trying to apply for new debt. Second, don't close your paid-off accounts. While it may seem like the optimal thing to do, remember that total credit number? You want to keep that number high so that your used credit appears lower. So, you've paid off that credit card? Great! Now chop it up or put it in a hidden drawer and keep that available credit without using it. Lastly, be careful about opening new accounts. While it lowers your debt-to-credit ratio as long as you don’t actually spend from them, your score also reflects the age of your accounts. The longer ago you applied for and got credit, the more likely it is you will qualify for new credit. Don’t waste that new credit qualification on anything else besides your home loan.

Want to know the best lenders to apply with once you've got the best score? Ask your real estate agent for their top recommendations for your situation and use their expertise to ease the qualification process.

About the Author
Author

Allison Jaffe

Welcome to Key Real Estate Services 

Providing professional representation for Sellers and Buyers throughout NYC and the northern suburbs.

Westchester/Rockland/Putnam: 914-661-0340

Manhattan/Bronx/Brooklyn/Queens: 718-874-2877

www.keyrealestateny.com

Meet Our Team

Allison Jaffe, Licensed Real Estate Broker

Office: 914-661-0340 or 718-874-2877, Ext. 2

Call/Text: 718-577-5284

Email: [email protected]

During more than 14 years as an independent broker, Allison has managed all manner of residential real estate sales – single and multi-family houses, condos, co-ops, and mixed-use -- from upper Manhattan, throughout the Bronx and Queens, across Westchester to Putnam and Rockland Counties. Allison specializes as a Sellers Agent, Seniors Real Estate Specialist (SRES), Estate Properties Agent, and a Certified Buyer Representative (CBR). Please see our menu of Client Services to learn more about each of these focused areas of real estate expertise.

"I determined early in my real estate career to focus on the specific needs of my respective clients rather than a specific geographic area. My job isn’t to sell buyers on a town or school district – they know where they want to live – my job is to sell the one property in that location that my client has to sell. My buyer clients want options and having lived and worked in Westchester, Rockland, the Bronx, and Manhattan, I know where to find those options.”

Linda Mancini, Licensed Real Estate Salesperson

Office: 914-661-0340 or 718-874-2877, Ext. 3

Call/Text: 718-619-8022

Email: [email protected]

Linda joined Key Real Estate Services in 2017 to expand our client representation throughout Manhattan, Brooklyn, and Queens. Extending the firm’s core principal of market expertise, Linda specializes in HDFC (Housing Development Fund Corporation) apartments in NYC that keep affordable housing options open to financially qualified families.

"I’m happy to represent the firm’s client-centric, market expertise approach to real estate throughout NYC. After more than thirty years of experience with HDFC properties, I’m able to guide qualified clients through the particular challenges of buying into and selling out of this unique homeownership option.”

Lea Mae de Guzman, Client Care Coordinator

Office: 914-661-0340 or 718-874-2877, Ext. 1

Call/Text: 718-577-5286

Email: [email protected]

Overseeing transaction activity, Lea works directly with Allison and Linda to keep every sale and purchase moving forward efficiently. With her finger on the pulse of each client’s transaction, Lea is at the firm’s administrative hub for scheduling, document processing, and coordinated communication.

"While I attend to the day-to-day clerical and communication needs for all of Key Real Estate Services’ clients, Allison and Linda are free to give their undivided attention to one client at a time in the field. I’m sort of the company's human tracking app that every client can access online, by text, or on the phone.”