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Do you know your debt-to-income ratio?

On Behalf of | Oct 5, 2020 | Bankruptcy

If you want to purchase a home, car or another high-value item, you probably need a decent credit score. While credit reporting bureaus are notoriously secretive about the formulas they use to calculate consumer credit scores, they all consider an individual’s debt-to-income ratio.

Your debt-to-income ratio is simply the amount of debt you have in relation to your income. To be sure you have the credit score you want, you should know how to calculate your debt-to-income ratio.

Determine your monthly debt

You may have more debt than you realize. Still, for a meaningful debt-to-income ratio, you must determine all your monthly debt. This may include the following:

  • Mortgage or rent payments
  • Utilities, food and other related costs
  • Credit card bills
  • Automotive and student loans
  • Any other monthly expenditures

Compare your income to your debt

After you have added all your monthly debt, you are ready to compare it to your income.

Look at your paystub and note your gross monthly earnings, the amount of money you make before taxes. Then, simply divide your debts by your gross monthly income and express the quotient as a percentage.

Assume you have monthly debts of $2,500 and gross monthly income of $5,000. Your debt-to-income ratio would be 50%.

Use the ratio to your advantage

Once you calculate your debt-to-income ratio, you can use the percentage to your advantage. If you have a ratio higher than 43%, you may have trouble obtaining a mortgage or other types of financing.

To better your credit score, you can either decrease your debt or increase your income. Pursuing bankruptcy protection may be another way to improve your debt-to-income ratio.