Calculating your Debt-to-Income Ratio
Your debt-to-income ratio is basically an expression of the relationship between how much you owe and how much you earn. Lenders will use your debt-to-income ratio, alongside your overall credit rating, to evaluate your financial situation and decide if you qualify for credit. The ratio is determined by dividing all of your monthly debt repayments by your income. Generally speaking, the lower the ratio, the better your financial situation and the greater chance of securing credit.
If you have a clear understanding of your debt-to-income ratio, it’ll help you take stock of your financial situation, which will help you decide whether or not you should be considering further credit or debt help. If your debt-to-income ratio is high, you should definitely be taking significant steps to solve your mounting debt problem. Essentially, calculating your ratio leaves you in little doubt as to your financial situation. There is no denying the debt anymore and the sooner you face up to your debt, the greater the likelihood of finding a suitable debt solution for someone in your circumstances.
As much as calculating you debt-to-income ratio can serve as a wakeup call to the severity of your mounting debt, it can also be a great way to stay motivated and keep you on the right track. If you keep doing the calculations as you stick to a programme of debt repayment or successfully follow through with a debt solution, you can track your progress and keep your morale up.
Debtsolver, the UK debt solution specialist and financial first-aider, have complied these easy to follow steps that will help you to calculate your debt-to-income ratio.
Firstly, add up all of your monthly debt obligations. That means all of them; this is no time for self delusion. Be sure to include all of your credit card debt; every loan, the unsecured and secured; your monthly mortgage repayments and your overdraft. If you rent rather than own, you should incorporate your rent in the same way as you would a mortgage at this stage. Basically, you want to find your bottom line debt commitment.
Now that you have your definitive monthly debt obligation worked out, divide it by your monthly income to work out your debt-to-income ratio. Debtsolver recommend using your net income rather than your gross income as everyone has to pay tax on their gross income. If you use your gross income, your debt-to-income ratio will appear more healthy than it actually is.
In the same way as your credit rating will impact on your ability to secure credit and influence the rates of interest that you’re offered, the higher your debt-to-income ratio, the less likely you are to be approved for credit and the higher interest rates you’re likely to be charged. You could also find that you’re asked to make a far bigger down payment in order to secure a mortgage.
If you are looking to tackle a debilitating debt burden, Debtsolver will be able to take you through the various debt solutions on the market in the UK and help you to decide on the one that best suits your circumstances. You will then be on the road to freedom from debt and will be able to chart your progress by calculating your debt-to-income ratio.
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