Debt to Income Ratio and Its Impact on Your Credit
What is debt to income ratio? Have you ever wondered what your financial future holds? Your is the best indicator of how healthy your money matters are. The lending industry uses your DTI to measure how your finances are likely to shape up in the future.
How is your calculated? DTI is your monthly minimum debts (with the exception of rent, utilities, food, and entertainment) divided by your monthly income.
How does this work in practical terms? Let's look at an example. Judy earns $ 3000 per month. Her monthly minimum payment for credit cards and loans is $ 500. Thus Judy's debt to income ratio is $ 500/$ 4000 = .12. In other word your DTI is a ratio of the amount of money you earn vs. your debt load.
So how do you know if your debt to income ratio is healthy or not? Analysts say that if your DTI is 10% or less this is good. If your DTI is 20% or higher, you may be headed for future financial problems. Even a small deviation from your usual debts like unexpected medical expenses could topple your finances.
Unfortunately most credit card companies are still issuing credit cards to people with a debt to income ratio of 50% or higher!
In the United States household debts have been pinpointed at in excess of 100% of available income in some years. In addition consumer debt figures stand at 1.7 trillion dollars! The average person is around $ 8500 in debt at about $1000 dollars in interest for each individual. Should we be buying more and more on credit and allowing our debt to income ratio to skyrocket?
What does this mean for consumers? With debt to income ratio rates so high it's clear that American consumers are not managing their finances properly. Bankruptcy rates have been as high as 1 million a year for the past few years.
Conversely, if you are able to maintain a low debt to income ratio you are generally given better interest rates and better credit scores. You are also in a more secure financial position - one that is able to deal with surprises. So it makes sense to keep your debts in check both for your own sake and for your family's future.
The responsibility for your financial future lies with you, not your bank, or the government. Remember, credit is big business and your credit card company relies on your bad judgment to continue to make money. You can improve your debt to income ratio by paying off your debts and not making new ones.
Have you ever thought of freeing yourself from debt and only buying what you can afford? This may mean saving for items you really want and being patient. Wouldn't you rather know that if the worst were to happen you would be able to take care of your family and not spend all your money keeping up with debt? Try to improve your debt to income ratio and your will improve your financial options for the future.
