Your Debt To Income Ratio
To stay out of debt, you must spend less money than you earn.
Implementing this financial plan is often more difficult than it
would seem. Your debt to income ratio is an important part of
your overall credit history. If you spend more money than you
earn, your debt to income ratio will be high, making it hard to
finance a home or make major purchases. There are two basic
factors are used in calculating your debt to income ratio - your
net worth and your total debt. There are standard guidelines
used in the credit industry to determine if your debt to income
ratio is too high. The standard may be a bit low due to the fact
that many have an acceptable debt to income ratio but still
struggle to pay monthly expenses.
Your total net worth includes your monthly net pay, overtime and
bonuses, and any other annual income. Your total debt includes
your mortgage, other loan payments or revolving accounts, car
payment, credit cards, and any child support you pay. If you
divide you total monthly debt payments by your monthly income,
you have your debt to income ratio. In the eyes of a creditor,
if your debt to income ratio is lower than 36% you are in good
financial shape. However, your personal situation, your unique
expenses, and your number of dependants will determine how much
debt you can reasonably pay each month. If your debt to income
ratio is less than 30 percent, you are in excellent financial
condition; 30-36% - you will have no trouble with lenders, but
should work to bring this number down to 30 or less; 36-40% -
you will most likely be able to get a loan, but you may have
trouble meeting your monthly obligations; 40 percent or higher -
you will need to evaluate your finances and work towards
eliminating debts.
Your credit card debt plays a major role in determining your
debt to income ratio. The amount you owe on your credit cards
has a direct bearing on your credit score. If your debt exceeds
your income, your credit score will drop. Many factors go into
determining your credit score, all of which are indicators of
your overall financial health. Lowering credit card debt is one
of the best ways to improve your credit score and your debt to
income ratio. The average American has over $8000 in credit card
debt. If you are paying the minimum payments each month, this
still takes a big bite out of your income. Even if your credit
history is excellent, with very few or no late payments, if you
have too much debt, you could be denied a loan.
Take control of your credit score by lowering your credit card
debt or eliminating it all together. Your credit score will rise
and you will lower your debt to income ratio. If you plan to
apply for a loan, purchase a new home, or want to buy a new car,
you must make sure your level of debt does not exceed more than
36% of your income. In addition, if you have several credit
cards with very low or zero balances, you would benefit by
closing those accounts and transferring any outstanding balances
to a credit card with a low interest rate. Some lenders will
calculate your debt to income ratio based on the amount of
credit that is available to you. If you have several dependants,
you may want to lower your debt to income ratio to around 20% to
ensure that you can pay your monthly debt comfortably.
This article has been provided courtesy of Creditor Web.
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