Your debt-to-income ratio is simply how much debt you owe creditors relative to your income. Credit reporting bureaus, such as Experian and Equifax, consider debt-to-income ratio and other information when establishing your personal credit score.
Lenders may also weigh your debt-to-income ratio when deciding whether to approve you for a mortgage, credit card, car loan or any other type of financing. The U.S. Consumer Financial Protection Bureau says that a ratio above 43% may make securing any loan more difficult.
Know your number
Even though credit and debt are often essential for Americans, the CFPB recommends keeping your debt-to-income ratio between 15% and 20%, excluding rent. To better manage your finances, you should know your number.
To calculate your debt-to-income ratio, add together every expense you must pay monthly. Then, divide the sum by your gross monthly earnings from your pay-stub. To convert your calculator’s answer to a percentage, move the decimal two places to the right and round to the nearest whole number.
Improve your ratio
If you are having trouble obtaining a loan, you may want to spruce up your debt-to-income ratio. To do so, you can increase your income, decrease your debt or do both. If your boss is not likely to give you a raise in pay, paying down your debt may be a realistic option.
You can also explore ways to discharge debts you cannot pay. Seeking bankruptcy protection may improve your debt-to-income ratio faster than you expect. After all, if bankruptcy does away with much of what you owe, you can use leftover funds to pay down other debts and improve your debt-to-income ratio.