What is a Debt-to-Income Ratio?

Your debt-to-income ratio is calculated by some lenders who have been asked to provide you with a loan or credit of some type. It yields a percentage which they can use to determine at a glance whether or not you have too much debt for your current income level. If your ratio is too high (you have too much debt), it may substantially affect your chances to get a loan, and you would be well advised to pay off some of your debts (or increase your income) before applying for credit.

What are the calculations?

Calculating your debt-to-income ratio is accomplished by taking your total monthly obligations and dividing it by your gross (before taxes) monthly income. This should yield a number less than 1.0, such as .30, which is converted without the decimal point to just 30. The lower your score the better. Any ratio higher than 37 to 40 is considered high and may be reason for a lender to deny you credit or increase the interest rate on any loan they may give you.

You can use certain calculators available on the Internet to quickly calculate your debt-to-income ratio and find out more on where you might stand with a potential lender. Keep in mind, however, that your debt-to-income ratio is only part of the picture that most lenders will look at before deciding whether to give you credit or a loan. Your credit score is also a large factor. A high score can be managed fairly quickly by paying off some of your credit card debts or outstanding loans if you have any. Even removing a $30 per month minimum payment on a credit card can have a substantial effect on your score and increase your chances of getting a favorable loan from a lender.