All you need to know about why is debt-to-income ratio important

All you need to know about why is debt-to-income ratio important

Take a look at why is debt-to-income ratio important. You will find all you need to know in this article. Keep reading to find out all the details about the debt-to-income ratio. 

Take a look at why is debt-to-income ratio important. You will find all you need to know in this article. Keep reading to find out all the details about the debt-to-income ratio. 

Keeping your debt at a manageable level is one of the foundations of good financial health. But how can you tell when your debt is starting to get out of control? Fortunately, there’s a way to estimate if you have too much debt without waiting until you realize you can’t afford your monthly payments or your credit score starts slipping.

Keeping your debt at a manageable level is one of the foundations of good financial health.

Your debt-to-income (DTI) is a ratio that compares your monthly debt expenses to your monthly gross income. To calculate your debt-to-income ratio, add up all the payments you make toward your debt during an average month.

That includes your monthly credit card payments, car loans, other debts (for example, payday loans or investment loans) and housing expenses—either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI) and any homeowner association fees.

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.)

Banks and other lenders study how much debt their customers can take on before those customers are likely to start having financial difficulties, and they use this knowledge to set lending amounts. While the preferred maximum DTI varies from lender to lender, it’s often around 36 percent.

Banks and other lenders study how much debt their customers can take on before those customers are likely to start having financial difficulties

Keeping your debt-to-income ratio low will help ensure that you can afford your debt repayments and give you the peace of mind that comes from handling your finances responsibly. It can also help you be more likely to qualify for credit for the things you really want in the future.

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