Finances: Debt to Income Ratio

 Debt to Income Ratio

When people are applying for any kind of financial assistance, they normally associate their credit score with being the most important number tied to their finances, and while the credit score is important there is another less publicly realized number: the debt to income ratio.

   What is a Debt to Income Ratio?

A debt to income ratio is self explanatory, it is literally a measurement of how much debt you have over how much income you receive. This ratio is one of the ways that lenders are able to measure your ability to make payments on the sum of money which you are asking to borrow. In most cases your debt to income ratio is expressed through your finances as a percentage and is made up of your total minimum monthly debt which is then divided by your gross monthly income. Of course this means that as a rule the lower your debt to income ratio is the easier it will be to acquire financial assistance. For instance if your debt to income ratio is around fifty percent or higher you may have difficulty qualifying. If your debt to income ratio is closer to twenty percent you will be able to borrow money more freely.

How to Improve a Debt to Income Ratio?

If your debt to income ratio isn’t to your liking, you have got two options, both of which are easier said than done. Your first option is to increase your income so that you have more money to work with when doing your finances. Your second option is to reduce your debts to enable your existing income to go further. For your second option, focus on paying off all your credit cards and other loans, and avoid taking on additional debts, while you are seeking to lower your ratio.