Acceptable Consumer Debt Ratio

Credit Utilization

Consumers interested in having the highest FICO credit score possible need to either carry some debt or use credit cards and pay them off monthly. An important component of your credit score is the credit utilization ratio. For the highest possible FICO scores, you should use no more than 30 percent of your available credit in any given month, with 10 percent being even better. If the credit lines on all of your credit cards total $5,000, you should never have a total balance higher than $1,500, with $500 being even better.

If you are applying for a conventional mortgage, the loan underwriter will have his own idea about what an acceptable consumer debt ratio is. Generally speaking, you should pay no more than 36 percent of your total before-tax income in debt payments, including your proposed mortgage. The government is willing to take a bigger risk with Federal Housing Administration loans, and may let that total debt ratio rise as high as 41 percent, or even higher if you have excellent credit.

To some consumers, there is no acceptable consumer debt ratio. These people say that any amount of debt is unacceptable, and that you should strive to live debt-free. They make a good case for this lifestyle. You can financially prosper in the long term when you don't make payments every month including interest. People live a more peaceful life when they are not worried about making payments, and what will happen if you do not make them. Also, without consumer debt payments, you can fund an adequate retirement and emergency fund, and be ready when a financial problem, such as a job loss or illness, affects your life.

Skeptics say that debt free living is not possible today. "You will always have a car payment" is a phrase commonly used by such people, usually as a way of justifying a new car purchase. They may also justify credit card use by the rewards or benefits that they receive. With some effort, any person can live a debt-free lifestyle. You may need to drive used cars, and save some money to pay cash for them. You may have to use your debit card or cash, or maybe carry one credit card with a low limit that is paid off each month. For many, these sacrifices are not sacrifices at all, and are a way to live a free, happy life.