Credit Card Debt-to-Income Ratios
Debt-to-income ratio or DTI is a financial figure which helps determine the health of your spending habits and your ability to repay your debts. This number plays a significant role in your credit score and your ability to secure new lines of credit. Many potential creditors, including credit card companies, pay close attention to this number when determining your eligibility for credit.
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How DTI is Calculated
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Your debt-to-income ratio is calculated by taking your monthly or recurring debt obligations, including your mortgage payment or rent and other obligations like student loans, and adding them together. This number represents the minimum debt you owe each month regardless of other spending. Do not include groceries or utility payments in this number as they can fluctuate from month to month. Your recurring debt is then divided by your gross monthly income. The resulting percentage is your debt-to-income ratio.
What's a Good Ratio?
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According to Bankrate's website, a good debt-to-income ratio is 36 percent or less of your gross monthly income. Money management website In Charge recommends a much lower debt-to-income ratio -- between 16 and 19 percent. This means your recurring debts are not a significant financial burden for you and you are able meet those financial obligations with relative ease each month. When your DTI percentage rises higher it means your finances are becoming strained because of excessive recurring debt obligations. This can put you at risk for missing payments on your debt obligations which may damage your credit score in the long run.
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Importance of DTI
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Credit card companies and other lenders look at your debt-to-income ratio to determine if you are financially capable of taking on more debt. The lower your DTI number, the more likely you are to be extended credit by a credit card company. Your debt-to-income ratio can also affect the amount of credit extended to you by the credit card company. And it can mean the difference between obtaining a higher- end credit card with increased spending power and international acceptance versus a credit card with a low credit limit and only national spending privileges.
Effect on Credit Score
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Your debt-to-income ratio has a significant effect on your credit score. A higher DTI number can mean the revolving balance on your credit cards is higher than normal. This means your cards may be close to being maxed out or maxed out already. This lowers your credit score because you are seen as an increasing financial risk. As a result, a credit card company that chooses to extend you credit may require a high interest rate.
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