Do you know what your debt to income ratio is? Do you know why it’s an important figure? Well, lenders and credit reporting agencies will use this figure as part of the criteria for determining your creditworthiness. So, it’s important that you not only know what it is, but also that you work towards making it as low as possible. It could mean the difference between obtaining credit or not.
What is a debt to income ratio?
This figure is used by creditors, lenders, and credit reporting agencies as part of the formula to determine your creditworthiness. This is not the only criteria they use, but it is taken into account. Someone with a high debt to income ratio may be seen as a high risk, and may have trouble obtaining credit or a loan. If they do get approved, the terms may not be as favorable as someone with a lower debt to income ratio.
What is a good debt to income ratio?
You want your debt to income ratio to be as low as possible. Creditors will see a low ratio as evidence that you do not rely too heavily on debt to get by. This tells them that you are a good candidate should you apply for a credit card, mortgage, or other loan. A debt to income ratio of 35% or higher will likely be viewed as high-risk. A ratio of 20% or lower will likely be seen as low-risk. As stated above, the lower the better.
How do you calculate a debt to income ratio?
Total Monthly Debt Divided By Gross Monthly Income
Add up all of your monthly debt payments (mortgage, rent, credit cards, loans, car payments, etc.). Then divide by your monthly gross income (that is your income before taxes are taken out).
For some help calculating your debt to income ratio, download ACCC’s free Debt to Income Ratio Worksheet.
Maybe lowering your debt to income ratio is one of your goals for the upcoming year. Be sure to take our poll to share you financial goals for 2015, and see the most common answers!
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.