How to Calculate Debt to Income Ratio

Personal Finance

Are you re-building your credit or just trying to focus on bettering your score? Maybe you’re trying to figure out the advance algorithm that the credit bureaus use to calculate your score? Unfortunately for us, we aren’t given the formula as to how our scores are calculated, just tips and subtle hints on how to make it better. Many people pull there report to get a little tip, “lower your debt to income”. Just so you know if you didn’t already. Your debt to income ratio is calculated by the amount of earned income which includes: salary, bonus, commissions etc…to how much debt or bills that you have outstanding.

How to calculate your debt to income is pretty simple. Follow these simple steps:

1. Add up all net income, like stated above this includes, salary, bonuses, commissions etc…
2. Add up your monthly debt, this includes: mortgage/rent, car payment, utility bills, personal loans and credit cards.
3. Now divide your total debt by your earned income and this will compute your debt to income ratio.
4. Ideally your ratio should be 0.36 or less. Lenders look at this and can determine whether or not to lend to you and it could affect your overall rate. 

Keep in mind your debt to income is only one minuet factor that makes up your credit score. Other factors include: balances on unsecure credit cards, Payment history, inquiries, length of credit history and variety of loans and credit lines that have been paid on time and or full or are being paid on time.

Although your credit is important, I recommend trying to use cash to purchase the things you desire especially if they aren’t a necessity. This will help you avoid habitual spending. Not to mention you are less likely to go splurging when you have to let go of a $100.00 bill compared to swiping plastic. Unfortunately, this is one of the reasons we are in this recession now. The credit card companies and banks are out for one thing and that’s profit. They could careless about your situation, so it best not to get yourself in a bind to begin with.

The government can attempt to place restriction on lenders, but they will just keep altering policies to compensate for losses caused by government restrictions. It honestly comes down to not trusting the lenders, it’s sad but true. Let’s start taking responsibility for ourselves, and our spending habits. Compute your debt to income and if yours is high then start paying it down.