Life is expensive. You probably have a car payment, phone bill, insurance, and a number of other necessary expenses each month. When you add all those expenses and divide them by your gross monthly income, the result is your debt-to-income ratio.
As an example, if your mortgage payment is $700, your phone costs $150, the car payment is $300, and other bills add up to $500, you shell out $1,650 per month. Let’s say your gross monthly income is $4,000. Your debts, $1,650, would be 41.25 percent of your income, $4,000.
Why does your debt-to-income ratio matter? When financial institutions are considering the risks involved in loaning you money or allowing you to access a line of credit, they look at your ratio. The higher your percentage, the riskier it may be to take a chance on you. Now, that isn’t necessarily because you are irresponsible financially. You may have a great credit history and a decent nest egg for down payments, which would show you can save and prepare. Rather, people with higher debt-to-income ratios are typically found to be more likely to have a hard time paying or keeping up with their monthly bills.
In general, a good debt-to-income ratio is considered to be anything below 43 percent, according to the Consumer Financial Protection Bureau. That is because it can be difficult or impossible to acquire a Qualified Mortgage with a higher number.
You aren’t out of luck if your debt-to-income ratio is higher than 43 percent, however. There are several ways to reduce your ratio, including:
- Increasing your payments: If you make substantial headway toward paying off some of your debts, such as your car loan, your overall debt will lessen.
- Manage your credit: Adding to the number owed on your credit cards may help you in the short term, but you will still be on the line for the money over time. Avoid swiping your credit card when it isn’t necessary, and you will thank yourself later.
- Avoid taking loans: Instead of leasing a new mattress, consider saving up for one or purchasing a cheaper option that is more affordable. Fewer loans means less documented money you owe other entities.
- Check on your progress: Add up your debts and divide them by your monthly income on the first of each month. Tracking your progress regularly can keep you motivated to continue making changes and digging out of your financial hole. Before you know it, you’ll just have to monitor your debt-to-income ratio to ensure you don’t go above43 percent.
Do you have questions about your debt-to-income ratio or want to know your credit card, loan, or savings options? Contact Resource One Credit Union, which serves the North Texas and Houston Metro areas. The financial professionals at Resource One will gladly answer your questions and help you on your way to a fit financial future.