Description: Know what your debt income ratio means, how you can calculate it, its different ranges and their implications.
The debt income ratio or debt to income ratio is the ratio between the amount that you spend towards your debts each month with the amount that you earn each month. This is expressed as a percentage. The debt income ratio is one of the most common tools to evaluate whether you have excessive debt. Lenders take this ratio into consideration to get an improved understanding of the borrower’s financial condition. They use this ratio simply to ascertain the trustworthiness of the borrower.
Debt income ratio calculation
To figure out your debt income ratio, you can use an online debt income ratio calculator. To work out your monthly debt payments, just enter your monthly mortgage payment or rent, minimum monthly credit card payments, monthly car payments and other loan obligations. To figure out your overall monthly income, input your gross monthly salary, overtime and incentives, alimony received (if any) and income from investment or other sources. Subsequently, divide your overall debt payments with your overall monthly income. The outcome is your debt to income ratio.
What your debt income ratio suggests to the lenders
Now that you’ve worked out this ratio, knowing what it implies is the following step.
1) 36% or below
This is a perfect debt burden to bear for most borrowers. This demonstrates that you’re able to manage your spending with respect to your income. Lenders prefer to see this while determining if you are trustworthy.
2) 37%-42%
Your debts might still appear to be controllable. However, you should begin paying them off before they start getting out of control. At this point, you can still get credit cards without much difficulty but obtaining loans might be harder.
3) 43%-49%
Your ratio is at a high level and financial problems might be in the offing if you don’t take instant measures.
4) 50% or higher
Go for professional assistance to create strategies for lowering your debts significantly before it causes you to have nightmares.
If you’re worried regarding your credit management, you can seek the help of a credit counseling agency. They can educate you on money management skills and how to manage your credit better. They can also train you on how to improve your debt to income ratio since this is a number which is as significant as your credit score.
