Debt-To-Limit Ratio

Every credit card has a limit. Most of us grok this fact all too well, as we clumsily fumble through pocket change to pay for a convenience store hot dog a week after coming home from that Bermuda vacation. Others of us have never sniffed the limit on our special-issue jet-black card that came special delivery in a gold-trimmed velvet box. Now that we think of it, those cards might not have limits. But take our word for it, most cards have limits. (You can't buy a country with the jet-black card...we think.)

The relationship between the amount of money you've spent on the card and its spending limit provides the debt-to-limit ratio. Basically, it answers the question "how much of your borrowing capacity have you used?"

Credit tracking companies use this number to figure out your credit score. If you're maxed out on your credit limits, you're seen as a bigger credit risk and your score will go down.

This relationship leads to a situation that sometimes confuses consumers: it's better for your credit score to have a lot of credit cards that you don't use, rather than to close those cards permanently. Having those unused cards increases your overall limit, making your debt-to-limit ratio lower.