What Is A Debt To Income Ratio And How Does It Affect My Credit?

Good credit can give you the freedom to make large purchases, take advantage of perks like airline miles, and more. Bad credit, on the other hand, can restrict your financial opportunities.

If you want to have good financial credit, it is important to understand how certain things affect your financial opportunities. One thing to consider is your debt to income ratio (or DTI). Keep reading to learn more about the connection between your debt to income ratio and your credit.

What Is A Debt To Income Ratio?

Your debt to income ratio (DTI) is usually calculated by dividing your monthly debt payments by your monthly income.

For example if you make $2500 each month and your debt payments are $700 each month, you would calculate your DTI by dividing 700 by 2500.

$700 debt payments ÷ $2500 income = .28 which means your debt to income ratio is 28%

When calculating your debt to income ratio, be sure to include car payments, student loan payments, credit card payments, and all other monthly debt payments.

What Affect Does Your DTI Have On Your Credit?

Your debt to income ratio is not used to calculate your credit score. However, lenders use it when they are trying to determine whether or not to approve you for a loan. It is also used to determine your interest rates on new loans.

What Is The Right Debt To Income Ratio?

In most situations, the lower your debt to income ratio is, the better your financial opportunities will be. As a rule of thumb, your DTI should not exceed 36%. If you are trying to qualify for a mortgage, a DTI higher than 43% may not receive approval.

If you need to improve your credit and lower your debt to income ratio, it may be wise to consult a credit repair company or an attorney who specializes in credit repair. For more tips on improving your credit, visit Lexington Law Reviews’ page with credit repair tips and tricks.