The Importance of Balancing Your Debt to Credit Ratio

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Lower credit. Ratio. If you carry outstanding balances from previous billing cycles, you must try to get rid of it first. Opting for a balance transfer, converting outstanding dues or purchases.

Generally, an acceptable debt-to-income ratio should sit at or below 36%. Some lenders, like mortgage lenders, generally require a debt ratio of 36% or less. In the example above, the debt ratio of 38% is a bit too high. However, some government loans allow for higher DTIs, often in the 41-43% range. Why is Your Debt-to-Income Ratio Important?

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Next, divide your monthly debt payments by your monthly gross income-your income before taxes are deducted-to get your ratio. (Your ratio is often multiplied by 100 to show it as a percentage.) For example, if you pay $400 on credit cards, $200 on car loans and $1,400 in rent, your total monthly debt commitment is $2,000.

You can calculate your debt-to-income ratio by adding up your monthly debt payments, including credit cards and loans, and then dividing that number by your monthly income. Multiply the result by 100 to get a percentage. For example, if you spend $1200 each month on debt and have a monthly income of $4,000, your debt to income ratio would be 30%.

That means your balance on that $5000 credit card should stay below $1500. This practice works better for you as well, keeping some cushion in your accounts for emergencies. Managing your Debt-to-Credit Ratio. There are a few tricks beyond merely using less of your credit to help keep this number under control.

Because your credit utilization is a simple ratio, you can easily estimate your own credit utilization. All you need to know are your credit card limits and credit card balances. You can get this information by checking your most recent credit card statement or by logging into your online account.

For example, if you have a total credit limit of $10,000 and $2,000 in credit card debt, your debt-to-credit ratio is 20%. Meanwhile, if your friend has $50,000 in available credit and owes $5,000.

“If the principal is paid down faster [than it would have been without the loan], the balance is paid off sooner, which helps to boost your credit score,” says Freeman. How Debt Consolidation..