Mastering the Art of Debt-to-Income Ratio
Introduction
Stressed over how to manage your debt-to-income ratio? Well, not any more. Debt management solutions are there to help you master your debt-to-income ratio.
What is Debt-to-Income Ratio?
In these slow economic times, is there a way to know how much debt is too much? Yes, it seems there is. The debt-to-income ratio, popularly known as DTI, is considered at the forefront of all factors in the mortgage industry. Debt management analysts consider it a snapshot of one’s financial health. Here is an example of how it is calculated:
Monthly income= $2,500
Debt= $1,000
Divide $1,000 by $2,500, and the debt-to-income ratio will be 40%. It might be noted here that the monthly income used for the DTI ratio is the take-home pay, excluding witholdings and taxes.
DTI Classification
- Within 30% – Up to 36% is considered healthy by debt management analysts. If there is no addition to your income and you manage not to take on any more debt, the consistent balance of DTI will enable you to pay off all your debt in a reasonable amount of time.
- 35%-45% – DTI within this range indicates financial trouble. If you are serious about not wanting to face a debt overload, it is wise to start paying it off now.
- More than 50% – If the DTI ratio has touched the figure 50, it means you are in the danger zone and need the professional help of an efficient debt management company.
Debt-to-Income Ratio Vis-à-Vis Credit Utilization
Many people assume the DTI ratio refers to credit utilization. But per debt management agencies, DTI is simply an estimate of your monthly debt and income balance, while credit utilization refers to the ratio of actual debt and credit limits. DTI gives a clear picture to your lenders about how much more debt you can pay off.
Debt-to-Income Ratio – a Good Debt Management Technique
DTI ratio is one of the best results-oriented debt management solution. Through the analysis of DTI, you can lessen the damage to your credit and become debt-free. Here are some helpful debt management tips:
- Identify the debts that have a bigger impact on debt-to-income ratio and work on paying those off as a priority.
- Review your budget to identify where you can reduce your expenditures. The amount saved can be added to your debt payments.
- If your debt-to-income ratio is out of line, debt management experts suggest refinancing. You can try a home equity loan or refinancing your mortgage to bring the ratio back into the recommended percentage range.
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