(i) Add up monthly before-tax income: salary, Social Security, disability benefits, alimony, etc.
(ii) Add up all fixed monthly expenses: mortgages, student loans, credit cards, car loans, and rent.
(iii) Divide monthly payments by monthly income, and multiply the result by 100.
Since this ratio gives lenders an indication of how much additional credit you can handle, a low ratio means a better chance of not being denied credit or paying a higher interest on loans.
Visit AnnualCreditReport.com and get a free copy of your credit report to see how your credit card spending is being viewed by banks and lenders. Is an account dragging your score down? Have you maxed out one of your credit cards? Consider using some of these strategies to help maintain healthy credit.
Having more than one credit card may be useful…
… as long as you manage them carefully.
Use your credit cards, but keep their balances low. According to Jeff Rose, best-selling author of Soldier of Finance: Take Charge of Your Money and Invest in Your Future: "One of the factors that may hurt your credit history is your utilization ratio: the percentage of your credit used vs. your available limit. Maxing out your credit card could hurt, unless you had several other credit cards that carried no balance."
Keep in mind, however, that how your credit utilization ratio contributes to your credit score also depends on your personal credit history, and could be different for everyone.
Knowing how credit works and understanding credit cards can help you build healthy finances, save money, and put your cards to their best use. Know the best interest rates, learn what a good credit history is, and study up on balance transfers, APR, average daily balances, prime rates, and more.
Download mobile apps that allow you to:
Does your bank provide free financial tools? Look for digital solutions that allow you to easily track your income and expenses, create monthly budgets, and keep sight of your financial goals—all with a simple swipe, tap or click.