| What Is Your Debt To Income Ratio? |
| How is your financial health? Are you spending less than you make? At first glance, your answer may be "yes," but in reality, many Americans are spending more than they're making, and in doing so, digging themselves further and further into debt. |
| Your debt to income ratio is the true measure of your financial health. Debt to income ratio is calculated by dividing monthly minimum debt payments (house payments, car payments, credit card debt, personal loans, and similar related expenses) by monthly gross income (income before taxes). |
| For example, someone with a gross monthly income of $5000 who is making minimum payments of $1485 on debt (loans and credit cards) has a debt to income ratio of .30 percent ($1485 / $5000 = .30). |
| Your debt to income ratio gives lenders an idea of who they are lending money too and whether or not you will pay your bills on time or at all for that matter. Figuring out your debt to income ratio will show you how much of your income will be available for your monthly mortgage payments. |
| What is the ideal debt to income ratio? Many financial experts say that the total amount you pay toward your mortgage should not be more than 28% of your gross income. At the same time, your debt payments should not be more than 36 % of your income. |
| Fill in the blanks below to figure out your debt to income ratio; then review the chart below to see where you stand. |
| Step 1: Monthly Debt |
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| Mortgage Payment |
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| Monthly home equity loan |
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| Car payment |
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| Credit card minimum payment(s) |
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| Student loans |
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| Personal loans |
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| Child support |
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| Total Monthly Debt |
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| Step 2: Gross Monthly Income |
| Gross monthly take home pay (before taxes) |
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| Bonus/overtime divided by 12 |
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| Other income divided by 12 |
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| Gross Monthly Income |
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| Step 3: Total Monthly Debt/Gross Monthly Income |
= %_______ debt to income ratio |
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| Results |
| 30% or less: You have excellent credit. |
| 30% to 36%: Pretty good. Most people fall within this area. This shows that you are in control of your spending and that you are worthy of credit. You won't have any problem with lenders. |
| 36% to 42%: Borderline. Even though your debts may be controllable, it would be a good idea to start paying them down before they become a problem. You should not have any problems getting a credit card at this ratio, however loans may be more difficult to come by. |
| 42% to 49%: Proceed with caution. You are headed for troubled waters. Take control of your debt as soon as possible. |
| 50% or higher: Trouble. This would mean that your credit situation is in need of professional help. Speak with a professional and work to reduce your debt. |
| Being aware of your debt to income ratio will help you make responsible decisions regarding your spending habits. If you allow your debt to get out of control, it will affect your chances of getting credit for large future purchases such as a home or a car. If you keep your debt to income ratio low, you will have a better chance of securing a lower interest rate and better terms when applying for credit. As you can see, keeping track of how much you spend versus how much you bring in is important. It is also a good rule of thumb not to spend what you don't have. |
