How Debt-to-Income Ratio Affects Your Credit
September 4, 2018
What exactly is the debt-to-income ratio? Debt-to-income ratio (also referred to as DTI) is the percentage of a consumer’s monthly gross income that goes towards paying debts. The DTI includes payments for rent or mortgage, credit card payments, all manner of loans, property taxes, insurance, and homeowner association fees.
Why does DTI matter? Your debt-to-income ratio is used by banks and other lending institutions to determine your borrowing eligibility. The lower your DTI, the greater your chances of being approved for that home you’ve been hoping to buy or the new car you’ve been dreaming about.
Figure Out Your Debt to Income Ratio
Determining your own DTI is fairly easy. To calculate, you would add the amount of your gross monthly payments made toward your debt, divide that number by your gross monthly income (before taxes), and then multiply the resulting number by 100 to get your ratio percentage.
What Your Percentage Means
If you have a debt-to-income ratio of 36% or less, that means that you are in a good spot, financially. Financial advisors would probably let you know that this would be a great time for you to set aside savings for retirement, or even just for life’s unexpected emergencies. If your debt-to-income ratio is between 37% to 42%, you are still in a good place and could probably even pay a little more on your debts each month to help pay them off a little faster. A DTI of 43-49% indicates that you may be teetering on the edge of financial distress, but you are not so deep in that you are unable to turn that number around. And finally, if your debt-to-income ratio is more than 50%, your chances of being approved for any big purchases using your credit are seriously reduced. Depending on how high your DTI is, it may be a good idea to consult a professional to help get yourself out of debt.
How to Lower Your Debt-to-Income Ratio:
There are several options for those who may be looking for a way to lower their DTI. One option, if able, is to increase the amount of payments already being made to reduce debt faster. Another option to consider would be to reduce the amount of your credit card spending and to avoid making larger purchases. For large purchases, it can help to save longer to build up a bigger down payment, which would require less credit for that purchase and would result in helping to keep your DTI lower. And finally, keep track of your progress to keep yourself motivated as you watch your DTI drop.
Keeping your debt-to-income ratio low is one way to ensure your financial health. Guaranty Bank & Trust has several options to help our customers establish retirement and other savings accounts to help keep your financial health where it should be.
To find out more about what we can do for you, visit us online or give us a call at (888) 572-9881.