By financen | September 12, 2014 - 3:53 pm - Posted in Debt, Debt to Income Ratio

Many financial institutions will first do a credit check on you and then calculate how much your debt to income ratio is before lending you their money. You can check your own debt to income ratio before applying for a loan. Follow these steps and know your debt to income ratio.

debt_to_income_ratioFirst you need to figure out your gross monthly income. You will find it in your pay stub or in your leave and earning statement. You can also use the W-2 form given at the end of the year by your employer.

Then you need to calculate your minimum monthly payments that you do towards your debts. Go through all your monthly bills and statements to calculate the minimum due each month. You can also check your credit report to calculate your minimum payments for each month. If you don’t have a copy of your credit report, you can get a free copy once in a year from all the three credit bureaus.

Once you know the gross monthly income and your total minimum payments of your debts, divide your total minimum payments by your gross monthly income.

  • For example:

Total Minimum Monthly Payments (debt) =$1,000

Gross Monthly Income (income)=$2,000

Divide $1,000 by $2,000 =.50 or 50% debt to income (D/I) ratio

According to this example, 50% of your money goes towards paying your debts. It must be a great feeling for you. If you have a 100% debt to income ratio, this means that you have no money left for your essential needs like food, clothing, etc. Having 50% of the debt to income ratio means that you are living paycheck to paycheck, but you are able to pay all your bills on time every month, go for an outing once in a while, or go on vacation. These numbers are perhaps good.

Calculate-Your-Debt-to-Income-RatioWhen you apply for a new credit with this debt to income ratio, many financial institutions know that you need some debt in order to rebuild your credit scores. They prefer your debt to income ratio to be below 50%. An ideal number will be below 30% and 10% is the best because this means that you have more money available to pay back your loans.

Be careful of the lenders who are willing to loan you money even if you have a very high debt to income ratio. They are going to charge you a lot of money in very high interests and fees and it will be very difficult to pay them back. You can always shop with different companies and see what their terms are in offering a lower interest rate loan.

  • Resources:

This entry was posted on Friday, September 12th, 2014 at 3:53 pm and is filed under Debt, Debt to Income Ratio. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Comments Off on Learn how to calculate your debt to income ratio

Comments are closed.