How to To Calculate Debt-To-Income Ratio And Reduce Debt : Free Knowledge

Debt-to-income ratio is a ratio that helps in measuring the ability of a potential borrower to pay a loan. Debt-to-income ratio is expression of present debt in percentage of income.

Instructions

1. Debt-to-income ratio is a ratio that helps in measuring the ability of a potential borrower to pay a loan. Debt-to-income ratio is expression of present debt in percentage of income. This allows a borrower to determine how much more debt or loan he will be able to handle without landing into debt trap.

2. First add all monthly loan payments that are to be paid such as mortgage, car loan, home loans and credit card payments.

3. Add all monthly income including salary, income from rent, fees, interest etc.

4. Divide total payment by total income to arrive at debt-to-income ratio.To express this ratio in percentage, multiple this ratio by 100.

5. If the debt-to-income ratio is 30%, it is an excellent and healthy debt-to-income ratio. One can get credit or loan very easily. If it is between 30-36%, it is considered good. If the ratio is between 36-40% it is considered to be borderline case and you need to do something to reduce this ratio. If the debt-to-income ratio is 40% or higher, then there is need for financial counseling as any further deterioration in debt-to-income ratio will lead to financial debt trap.

6. An average debt-to-income ratio is typically 2:5. The total amount owed per month should not exceed 30-40% of monthly income. There are two types of debt-to-income ratios: front and back. The front ratio takes into account the amount that is spent on necessary household bills. The back ratio takes into account income that is used to pay all other debts like personal loan, credit cards installment, alimony payments etc.

7. The simple way to reduce DTI ratio is by budgeting. Start in earnest and spend only on necessities so as to pay for credit installments. Another way is to save. Open a saving account and regularly deposit in that account. This amount will come handy in emergencies. When credit card bill is due, do not pay just the minimum amount. If possible pay out the entire bill. This way, it will be possible to keep healthy debt-to-income ratio.

Tips & Warnings

• If you can't get your budget straight, don't be afraid to go see a financial planner.