The Debt to Income Ratio is a good way for creditors to compare your income with the amount of debt you currently have. Most creditors use this tool to determine if extending credit to you will put the creditor at risk. If you have ever applied for a credit card or line of credit, you know that the amount of debt you owe plays a large role in how much credit is extended to you, as well as what type of interest rate you receive. The Debt to Income Ratio is calculated by taking your total monthly debt payments and dividing this amount by your total take home pay. In some cases, some creditors may use gross pay (before taxes) instead of take home pay for this calculation.
Debt To Income Ratio Calculator: How To Calculate Your Ratio
Following is an example of how the Debt to Income Ratio is calculated:
Susie’s take home pay is $2000 per month.
Susie’s total debt payments are $700.
Susie’s debt to income ratio is $700 / $2000 = 0.35 or 35%
And here’s an easy, automated way to calculate it — by using Bankrate’s debt to income ratio calculator. Check out this link or click on the image below to try it out.
Q & A About The Debt To Income Ratio
1. What’s the best percentage to have for a Debt to Income Ratio?
The best Debt to Income Ratio to have is 10% or less. This means that you have a minimal amount of debt and a substantial amount of income. You are in the best position to receive credit cards and other credit with lower rates and excellent terms.
If your Debt to Income Ratio is between 10%-20%, you are still a good candidate for creditors to extend credit. You may not have the very best terms with creditors, but you are still more likely to receive a lower interest rate on a credit card or line of credit than someone with a much higher debt to income ratio.
If a loan applicant has a Debt to Income Ratio of 20%-35%, a creditor is more likely to investigate further before providing any lines of credit or credit cards to the loan applicant. They may ask for documentation or proof of your income. Typically, if you ratio is this high, your interest rates are in a much higher range for credit cards or credit lines because you are a higher risk for not repaying the debts back.
If you have a Debt to Income ratio of 35% or higher, you are more likely to be denied credit by a lender. This is because you are a very high credit risk. Your credit card or other debt payments make up a large percentage of your take home pay. Therefore, you may get into a situation where you are unable to make these payments at all. If you have a Debt to Income Ratio that is this high, you should think about paying down your debts immediately. This type of ratio may also indicate that you have an issue with spending more money than you make. You may need to seek the assistance of an accredited credit-counseling agency for assistance in paying down debts.
- Debtor’s Anonymous for providing support and fellowship among recovering debtors
- National Foundation For Credit Counseling for credit counseling
- Debt Consolidation Care for your debt consolidation needs
- for mortgage refinancing and personal loan needs
- Home Foreclosure Fighter for loan modification services
- Lower My Bills for home refinancing, debt consolidation and debt management
It’s important that you always do your due diligence before subscribing to any new service or before joining any community.
2. How can I improve my Debt to Income Ratio?
Your Debt to Income Ratio can be improved by simply increasing your income and/or paying down your debt balances. The less debt you owe, the better. By not having a large amount of debt, you enable your money to grow and your net worth to build over time. You want to shoot for a Debt to Income Ratio of 10%-20% and no higher than this. Keeping your ratio this low may be difficult at first, especially if you have a high amount of debt. A good strategy is to use the Debt to Income Ratio as a guide to controlling your ongoing debt. By working on your existing loans and by following strategies for keeping your Debt to Income Ratio low, you’ll be on your way to financial success.