In simple words, your debt to income ratio is an indicator of the part of your income which you spend towards clearing your debts. Mathematically, it is the number obtained when you divide your total expense towards clearing your debt in a particular month divided by the gross income you earned in that very month. This debt to income ratio (usually represented by the abbreviation DTI) has a major influence on your creditworthiness.
When a bank or any other loan giving organization analyzes your creditworthiness, they all prefer the lowest DTI possible. In the United States, financial advisors and experts recommend a debt to income ratio of less than thirty-six percent. If your DTI is less than thirty-six percent, you should have no difficulty in getting a loan from a bank. If it is higher than the stated limit you must reduce your DTI further. As is evident from the mathematical formula, this can be done by minimizing your debt or if you are unable to do so, find a way to increase your income.
There is no clear way to reduce your debt apart from minimizing your credit card usage and controlling your borrowing. On the other hand, there are many ways to increase your income. Getting a promotion or a pay raise may not be possible every time so getting a part time job can be beneficial. It is a quick solution and you can do so till you manage to lower your debt to a comfortable level. Another tactic which must be employed is the lowering of your expenses.
If your dept to income ratio is around forty percent you must consider taking serious steps to lower it. Your creditworthiness is seriously threatened and you must stop the situation from getting worse. If you cross the fifty percent mark, you are in the red zone and must go in for the help of a expert as soon as you can to get out of this crisis situation.
When calculating your debt to income, remember that your gross income is the sum total of all the money you have made in that month and the deductions like savings and taxes paid are also included.
Do all that you can to have a low DTI as this not only benefits your creditworthiness, it also benefits your credit score. A higher credit score is a very positive sign and signifies that you have a remarkable credit history. This will be most beneficial when you go to apply for a loan as a good credit score will give you aren’t forced to resort to payday loans for needed cash.