Ranging from a student, auto, and home loans, and credit cards, 80% of US citizens are under some form of debt with the collectively valued at $14 trillion. Therefore, if you plan to buy a house or a car in the future, you must know where you stand in terms of credit.
Being aware of your debt-to-income ratio (DTI) can help you gauge where you stand and how will lenders view you. Let’s have a look at a debt-to-income ratio.
What Is It? How Do I Calculate It?
Your debt-to-income ratio measures your ability to manage your debt. You can calculate using 2 bits of financial information: your income and your debt.
By taking your monthly income, including money earned before deduction and taxes, and total monthly debt, you can calculate your debt-to-income ratio.
For instance, if the total debts are more than $1,500 and your income is $4,000, you can see your DTI increasing. Suppose your monthly debt equals $2,000 and your total monthly income is $4,000, your DTI would be 50%.
What’s an Ideal DTI?
If you’re not planning to purchase a home, car, or opening a credit account, you shouldn’t care about your DTI. However, if you’re planning to seek credit, your application process will include a comprehensive examination of your finances. This examination will vary with each lender as they may have their specific criteria to approve your application.
As your DTI shows your ability to repay and manage debt, a higher DTI means that there are more chances of you getting rejected. Creditors look for people with a debt-to-income ratio, not more than 43%.
Therefore, if your monthly income is $4,000, then your monthly debt should be more than $1,720. While 43% is an acceptable ratio, having a DTI lower than that would be better.
How Can I Improve My Debt-to-income Ratio?
If your DTI is more than 43%, don’t fret. You can change it! As your total monthly income and debts are two of the essential factors to calculate your DTI, there are many ways you can be in a better financial position by lowering your DTI.
The best thing you can do is decrease the amount of debt you owe. Suppose you’ve borrowed a loan of $5,000. The monthly pay and your debt will calculate your DTI. If you make extra payments for your loan, you’ll be able to pay off your debt faster and decrease the amount of money owed.
Moreover, if you want a better DTI, you can ensure that you don’t add debt to your account and increase your income by taking part-time jobs and other gigs for more cash.
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