Correct Amount of Debt Leverage to Build Credit

When it comes to building or improving your credit score, using debt wisely and strategically is key. The goal is to show responsible use of credit, not to avoid or overuse debt.

Best Practices for Debt Leverage to Build Credit1. Credit Utilization Ratio (CUR) – Sweet Spot: 1% to 10%

• The credit utilization ratio is the percentage of your revolving credit (like credit cards) you’re using.
  
• Formula:
  Current Balance ÷ Total Credit Limit × 100
  
• Example:
  If your limit is $1,000, try to keep your balance between $10 and $100.
  

Why?
Low utilization shows lenders you’re not reliant on debt but are actively using and repaying credit.

2. Installment Debt (Loans) – Low Balance, On-Time Payments

• Mortgages, car loans, and personal loans also help build credit.
  
• Focus on:
  
  • Making on-time payments
    
  • Avoiding early payoffs if your goal is to build a long positive payment history
    
  • Keeping your debt-to-income ratio (DTI) under 36%
    

3. Healthy Overall Debt-to-Income Ratio (DTI)

• Ideal DTI for credit health: below 30%-36%
  
• Formula:
  Monthly Debt Payments ÷ Gross Monthly Income × 100
  
• A lower DTI shows lenders you manage debt comfortably.
  

What to Avoid

• Maxing out credit cards (even if you pay in full later—high balances can still report at the wrong time).
  
• Carrying large revolving balances month to month.
  
• Opening too many new credit accounts at once.
  

Golden Rule for Smart Credit Leverage:Use credit lightly, pay consistently, and let accounts age.