In addition to the credit score and credit report, your debt-to-income (DTI) ratio is another important factor in your overall financial health. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt and is used by lenders to determine the risk associated with you taking on another credit.
How to Understand Debt-to-Income Ratio?
Lenders use your debt-to-income ratio along with the credit history to estimate your ability to afford repayment and to pay off the debt.
The debt-to-Income ratio of 35% or less means that your debt is at a manageable level relative to your income. This debt-to-income ratio is favorable to lenders as you most likely have remaining money after you’ve paid your bills.
If your ratio ranges from 36% to 49%, you are managing your debt adequately, but you may want to consider lowering your DTI Ratio to obtain the loan or line of credit you want on better terms.
With more than 50% of your income going toward debt payments, you may not have much money left to save, spend or handle unforeseen expenses. With this DTI Ratio you become less attractive to the lenders, thus they may limit your borrowing options.
The maximum DTI Ratio varies from lender to lender. However, the lower the debt-to-income ratio, the better chances that you will be considered and then approved for the credit application.
How to Calculate Debt-to-Income Ratio?
To calculate your DTI Ratio, add up your minimum monthly debt payments then divide the total by your gross monthly income.
Debt includes your regular monthly payments on personal, student, car loans, mortgages or any other type of loan. Your monthly minimum credit card payments also count as debt, as do unpaid bills sent to collection agencies.
Your gross monthly income is the sum of everything you earn per month before taxes or deductions are imposed. This includes your basic monthly income and any additional commissions, bonuses and investment income that you earn each month. To calculate your gross monthly income, take your total annual income and divide it by 12 months.
How to Lower Debt-to-Income Ratio?
In order to get a loan on more favorable terms, you may want to lower your debt-to-income ratio. There are two ways to do that: by reducing your monthly recurring debt or by increasing your gross monthly income. Also, debt consolidation may help you get a better interest rate and pay down your balances sooner, as well as help lower your debt-to-income ratio.
Thus, the debt-to-income ratio is another aspect that speaks of your financial well-being, which is considered by lenders when issuing various types of credit lines and loans. The debt-to-income ratio requirements can vary depending on the lender and the type of loan or credit you want to apply for. According to the specified algorithm, you can calculate your percentage and, if necessary, take certain measures in order to improve it.
Latest Other Card Guides
Millions of Americans are at risk of identity theft every year. It’s a growing problem in the U.S., especially during the pandemic as identity thieves are targeting relief checks and unemployment benefits. Identity theft occurs when someone steals your personal information such as your Social Security number, bank account number or credit card information. There […]Continue »
The consumer credit market is picking up the pace while credit cards are becoming the preferred payment method for Americans, especially during the COVID-19 pandemic. Consumers are being drawn to credit cards because of their flexibility and the increased variety and volume of rewards programs. For any person, a credit card can be a good […]Continue »
RedArrow Loans (former Fast 5k Loans) is a loan aggregator with an extensive network of authorized lenders. They specialize in short-term loans that are available almost in all 50 states (currently, there are no offers available to residents of AR, CT, GA, NY, VT, and WV). RedArrowLoans is operated by Sincerely, LLC, a financial services company […]Continue »
If you pay for most of your purchases with cash, checks or debit cards and shun your credit cards, you probably think you’re being fiscally responsible.Continue »
Imagine that you choose between two similar credit cards one of which does offer complimentary concierge services as a benefit while the other doesn’t. Would this be a decisive factor for you? Most likely not. Despite the fact that many credit cards have this perk in the rewards list, potential applicants rarely pay attention to […]Continue »