Why Should I Worry About My Debt to Income Ratio?
Question: Why Should I Worry About My Debt to Income Ratio?
Your debt to income ratio is one tool that you can use to gauge the amount of debt that you have. Lenders also look at your debt to income ration in order to determine if it is safe for them to lend you the money. The lower your debt to income ratio is the better, especially when it is time to buy a home.
You can figure out your debt to income ratio by adding together the amount you pay in debt payments each month.
Then you divide that number by the amount of money that you make each month and the resulting percentage is your debt to income ratio. If you had $500.00 in debt payments each month and made $40,000.00 a year ($3333.33 a month) your debt to income ratio is 15%, which is considered good.
If your debt to income ratio is higher than forty percent you are in danger of being unable to pay your bills if you were to incur more debt. This makes you much more reliant on your current income and may prevent you from taking new opportunities. You should strive to lower the number until it is at zero.
You can lower your debt to income ratio by reducing the amount of debt that you have. If you set up a debt elimination plan you can get out of debt quickly. You need to concentrate any extra money you have to pay towards debt on one debt at a time. This will reduce the principle much more quickly and help you to change your financial picture.
It is also important to consider your debt to income ratio before you take out a new loan. If you borrow an amount that will put you near forty percent, you should reconsider taking out the loan. You can find a car that is less expensive or if it is luxury item you may need to save up and pay for it with cash.
It is important to watch your credit card debt, since it can sneak up on you and really affect your debt to income ratio.
If you do not watch out for this number, you may make a costly money mistake. It can be very restricting to have the majority of your monthly income go toward debt payments each month. The higher this number goes, the more danger you are in of defaulting on the loan and hurting your credit score. While not everyone will be able to be totally debt free in their twenties, you can work on lowering your debt to income ratio. This will make it easier to qualify for a mortgage when you need one. Take the time now to set up a debt payment plan and to get on a budget so you can change your situation. You may be able to be debt free except for your home in just a few years time. The sooner you make the changes the easier it will be to change the situation.
It can be scary to look at your debt-to-income ratio, as well as your entire amount of debt, because it stops you from lying to yourself about your finances. you can see exactly where you are financially and create a plan that will help you get out of debt and change your financial future. Stop making excuses that keep you in debt and take the time now to make these changes.
Doing this can help you realize how your debt may be hurting you.