A debt to income ratio calculator will help you compare the amount of money that you owe to the amount of money that you bring in annually. The comparison between your financial obligations and your income can impact your ability to qualify for loans the same way your overall credit score can. If you are carrying far more debt than you can cover through your annual salary, lenders will be less interested in giving you new car loans or mortgages.
How to Calculate Debt to Income Ratio
Calculating what you owe compared with what you earn is not very difficult. The best way to start is by making a list of everything that you pay out each month. The calculations should be based on a 12-month cycle so that you include items that may not be paid every month of the year. Figure your credit card payments at their monthly minimum rates, regardless of how much you really pay toward them monthly. Once you have added up your debts, simply compare them with your net annual salary. Remember to include child support or alimony payments as part of your income. Divide your debt total by your income total and you will have your debt to income ratio.
How the Ratio Impacts Your Credit
Lenders tend to put as much weight on the debt to income ratio as they do on the overall credit score. Your debt will be reflected in your credit score, of course, but the exact ratio between what you owe and what you make provides a more detailed snapshot of your financial situation. You may be able to maintain a decent credit score by paying your bills on time, but you may still have trouble finding someone willing to accept you for a large loan if you are carrying a great deal of debt.
Keeping Your Debt to Income Ratio at a Reasonable Level
Reducing the amount that you owe is the only effective way to bridge the gulf between what you owe and what you earn. Try to pay at least double the minimum required monthly payment on any credit cards. Refrain from using credit cards unless it is an emergency. Avoid making large purchases until your debt has been brought down to a more manageable level. If you are unsure what to do next, you might consider seeking help from an experienced credit counselor or consider debt consolidation.
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