Do you know how to calculate your debt to income ratio? If you don’t, here is a quick review: it is the percentage of your disposable income that goes toward your outstanding debt. For example, if your credit card debt is $5000 and your annual income is only $3000, then you have a debt to income ratio of 40%. Now, we are not talking about the debt to income ratio of someone who has multiple credit cards.
What we are talking about is the debt-to-income ratio of someone who has one credit card and minimal debt. That’s why debt-to-income ratio calculation plays such an important role in credit scoring. You see, the higher the debt-to-income ratio, the more risky your credit score is. In other words, a high ratio equates to a high risk on your part. That is why people with poor or bad credit score find themselves with negative FICO scores and high levels of debt.
What can you do to remedy your situation? First of all, get a copy of your credit reports from each of the three credit bureaus. There are new laws out today which require the reporting companies to provide you with an electronic copy of your reports if you request it. Do this for all your credit accounts. The purpose of this is to make sure that all of your debt is listed accurately.
Once you have done that, go over all your debts and payments. Note when and why you made a particular payment. Also note if it was a payment by check or cash and how much you owe. Now, if you notice any errors on your credit scores, contact the collection agency that provided the original creditor with the information. They are required to correct the error.
If you do not pay by check or money order, make a payment in cash. You may want to bring along an original bill from the company who provided the collection agency with the check or money order so that you can present it to the collection agency. They are required by law to verify all of the information contained in this document. In the case of debts where there is a balance owing that has not been previously paid on, the debt collector may agree to a settlement arrangement.
Another question that you will need to answer when attempting to answer the question of “what is my debt to income ratio?” is your credit score. The higher your credit score, the better off you will be. Your debt to income ratio will reflect the amount of debt that you actually have versus the amount of income that you have available to you.
Finally, one question that you will need to answer is what your debt-to-income ratio is compared to your income ratio. For example, if you are planning to refinance your mortgage in order to take advantage of lower interest rates, you should calculate your debt-to-income ratio in the process. This will help you see how your monthly expenses and income can change once you get a new mortgage. You might find that the amount of money that you would have to pay monthly in mortgage payments would dramatically change. If so, your debt-to-income ratio should reflect that change in your monthly budget. You can also use this same method to work out your debt to credit ratio for any kind of credit-related emergency that you might run into.
It will not be difficult for you to understand the concepts presented above once you begin to delve into answering the question of “what is my debt to income ratio?” Keep these points in mind as you work your way through the many questions that you will need to answer. As you improve your credit score, your debt to income ratio will reflect the improvements.