Consumer Awareness

Debt To Income Ratio Information

Debt-to-Income Ratio - What is it and why is it important?
Knowledge of the state of your household's current financial standing is important and something that everyone should review from time to time. An easy way to see where you stand financially is by calculating your debt-to-income ratio. By monitoring your debt-to-income ratio regularly, you can better manage your personal finances and also see how lenders may view you when considering you for a loan, credit card or other financial product.

What is a debt-to-income ratio?
Your debt-to-income ratio compares the amount of your debt to your income. The ratio is best figured on a monthly basis. For example, if your gross pay is $2,000 and you pay $600 per month in debt payments, your debt-to-income ratio is 30% ($600 divided by $2,000 = .30). You can also use our convenient debt-to-income ratio calculator.

Why should you monitor your debt-to-income ratio?
Keeping track of your debt-to-income ratio can help you avoid "creeping indebtedness," or the gradual rising of debt. Impulse buying and routine use of credit cards for small, daily purchases can easily result in unmanageable debt. By staying aware of your debt-to-income ratio, you can:

  • Make sound decisions about buying on credit and taking out loans.
  • See the clear benefits of making more-than-the-minimum credit card payments.
  • Avoid major credit problems.

Take control over you debt with this handy household budget spreadsheet.

Creditors may use your debt-to-income ratio to determine whether you're creditworthy. If your ratio rises above 39%, it may:

  • Jeopardize your ability to make major purchases, such as a car or a home.
  • Keep you from getting the lowest interest rates and best credit terms.
  • Cause difficulty getting additional credit in case of emergencies.

Debt-to-income ratios are powerful indicators of creditworthiness and financial condition. Know your ratio and keep it low.

How to calculate your debt-to-income ratio?
The first step in calculating your debt-to-income ratio is figuring your gross monthly income. If your income is inconsistent, estimate your gross monthly income by dividing last year's annual income by 12. Then, write down and add up all of the debt payments you make each month. (Using this online form may help you remember all of your monthly debts and can help you quickly calculate your debt-to-income ratio.)

Is my debt-to-income ratio acceptable?
Generally, the lower your debt-to-income ratio, the better your financial condition. Lenders generally view debt-to-income ratios under 39% as good. If you are at the lower to mid point in this range, you may be in a position to afford to take on additional debt, if needed. At the upper end of the range, additional debt may cause you to be over extended.

It is important to keep in mind that individual or household capacity for debt can vary significantly. Your lifestyle or stage in life can dramatically influence your ability to carry debt.

In these ranges of debt to income, you may be able to save a small to substantial part of your income each month. If you are unable to save at this debt level, you should consider cutting back on discretionary spending. Cutting back on things like recreation, entertainment, vacations, etc., may put you in a better position to save as well as being able to handle additional debt more comfortably.

Calculate your debt-to-income ratio now!