Debt To Income Ratio And The Effect On Your Credit Rating
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Finance > Credit
Nov 30, 1999
Debt To Income Ratio And The Effect On Your Credit Rating
The debt to income ratio also known as DTIR is calculated using the payment you pay towards your total debt as a percentage of your total gross income. Lenders use the ratio to determine how much you can borrow based on payments such as insurance, property tax, unsecured financing etc. How To Calculate Your DTIR: The ratio is expressed as a percentage, and can be calculated by dividing your monthly payments on your long term debts by your gross monthly income. As a working example, if your total debt payment stands at $1375 per month and your gross income is $3125 per month, to calculate your percentage, divide $1375 by $3125. This would give you a DTIR of 44%. According to mortgage news daily the recommended acceptable ratio is 35%. This is broken down into two parts, 25% for home related expenses and 10% for all other expenses. Keep A Low Debt To Income Ratio: Having a low DTIR is important as your ratio is used to determine your credit worthiness. A lender would hesitate to lend to you if your ratio is high as it would indicate that you may have trouble paying your debts in the future. This could be problematic when it comes to purchasing major items such as your home. When your DTIR is high, you do not attract the lowest interest rates on credit cards and other credit facilities; this is because the lender sees you as a default risk and would charge you a higher rate to protect their business. Managing Your Credit Card Debt To Reduce Your DTIR: A major expense that contributes to your DTIR percentage is your credit card debt. If your ratio is near or above the acceptable limit, then you must take action to reduce it. The following tips would therefore be useful to you. 1. Approach your credit card provider to get a reduced interest rate. You would need to meet the lenders criteria such as having a good credit rating, prompt bill payments etc. in order to qualify, but it is worth looking into. 2. Use your credit card for necessary purchases only. Charging all your day to day purchases on your credit card pushes the balance and your minimum payment up. This would adversely affect your DTIR as the debt payment increases, especially if your income remains the same. 3. Avoid extra charges, by paying your bill on time, every time. Stay within your limit at all times. To achieve a lower ratio; you must work at reducing your monthly expenses. Debt reduction takes self control and sacrifice, but in the end, with reduced debts, you would have less monthly expenses and a lower debt to income ratio. This would open up the market for you to access financing for the larger necessities in life at a much better interest rate than you would if your rating were not in good standing.
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