The Effect of Debt-to-Income Ratio on Credit
Nearly everyone has heard the term "credit score" or "FICO", but many people don't know how the FICO score works together with other scores to create a complete picture of an individual's credit. One of these is the debt-to-income ratio, also known simply as the debt ratio.
-
Debt-to-Income Ratio
-
The debt-to-income ratio measures monthly debt payments compared to monthly income, often expressed as a percentage. For example, $300 debt and $1000 income is a 30% debt ratio.
Lenders' Limit
-
A lender usually wants to see no more than 36% of a person's monthly income tied up in monthly debt payments.
How it is Used
-
A lender will look at the debt-to-income ratio in relation to the person's income, FICO score, investments and assets when determining ability to repay a loan.
High Ratio
-
If your debt ratio is above 30%, you may be considered a high risk for new loans, causing the lender to charge higher interest or deny credit altogether.
Low Ratio
-
A low debt ratio can help you. Someone with a poor FICO but a low debt to income ratio will be considered less of a risk than someone with the same FICO and a higher ratio.
-
Related Searches
References
Resources
- Photo Credit Image by Flickr.com, courtesy of Andres Rueda
Comments
-
acklenackle
Dec 01, 2009
5 and rec. You made a good point. I never knew about the income to debt ratio.
