Consumer Debt to Income Ratio

Consumer Debt to Income Ratio thumbnail
A consumer's debt to income ratio can affect many factors.

The Federal Reserve Board refers to the consumer debt to income ratio as household debt service and financial obligations ratios. A consumer's debt to income ratio can play a role in a number of financial events including auto loans, mortgage approvals and credit card rates.

  1. Factors

    • The consumer debt to income ratio is determined by two factors: monthly debt payment obligations and the amount of personal disposable income a family or household has. The income used is a person's income before tax, while both mortgage and consumer debt such as credit cards or automobile loans are considered consumer debt. Additional examples of consumer debt may include home equity loan payments, student loans, alimony and any other loan product the consumer is obligated to repay.

    Importance

    • A number of financial institutions consider a consumer's debt to income ratio when determining whether or not to grant a credit product to an applicant. The debt to income ratio is also a factor for homeowners who are attempting to modify their mortgage payments. Financial institutions will examine an applicant's debt to income ratio to determine the likelihood that he would default on a credit product if finances got out of hand. A potential employer may also examine a debt to income ratio when doing a background check on an applicant.

    Suggested Ratios

    • Although each financial institution has different lending standards, a debt to income ratio of 36 percent or less is a preferred industry standard. Institutions granting mortgages prefer that a mortgage payment take up no more than 28 to 31 percent of an applicant's income each month.

    Lowering Debt to Income Ratio

    • For consumers with debt to income ratios above the suggested amount, lowering the percentage can increase the likelihood of obtaining a credit product in the future. To lower debt to income ratios, consumers may choose to pay a larger amount each month to their credit accounts, decreasing the total amount owed. A consumer may also choose to take on an extra job or additional hours in order to increase the income side of the ratio.

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References

  • Photo Credit heavy purse image by Julia Britvich from Fotolia.com

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