What Is Better, A Lower Debt To Income Ratio Or Having A Debt In Good Standing?
Between the two, it is better to have a low debt to income ratio. While having a debt in good standing is very good, lenders give major weight to your debt to income ratio when you apply for credit. This is because they want to make sure that you can afford to pay back your loan if they grant you one. So you should reduce your debt to income ratio.
Let’s say you have a credit card (or several) where you’ve maxed out your limit, but make sure you pay it diligently every month. When you apply for a loan, such as a home mortgage or auto loan, the lender will look at your debt to income ratio. Even if all your debts are in good standing, if your debt to income ratio is high there is a big chance that your loan application will be denied.
To have a low debt to income ratio, make sure that you always make payments on time, but do not max out your credit lines. Control your spending, and wherever possible pay in cash.
How Is The Debt To Income Ratio Computed And How Does It Affect My Credit Score?
Lenders make two computations of your debt to income ratio. The first, called PITI (property, interest, taxes, insurance) or front ratio, is the percent of your income that is paid for housing costs. To get this figure, you add the mortgage principal and interest on your housing loan, property taxes, homeowners association dues, and your hazard and mortgage insurance premiums, then divide the total over your gross monthly income. If you’re renting your house, then it’s your rent expense divided by your income.
The 2nd debt to income ratio is called the back ratio and is the percent of your income that you pay in recurring debt-related expenses. To get this figure, you total your PITI and any other debts such as your car loan, credit card payments, student loan, child support and/or alimony payments, and any legal judgments. Divide the total over your gross monthly income.
Gross income is your monthly salary as well as any bonuses, income from dividends and interest, support payments to you such as child support or alimony, and any tips and commissions.
Financial experts say that your PITI expenses should not exceed 28% of your income, and your total debt related expenses should not exceed 36% of your income. The lower your debt to income ratio , the healthier your credit score will be and you will also have a better chance of having your credit applications approved. If you apply for a mortgage loan, you will be given better interest rates and repayment terms.
Comments
Peter March 25, 2009 08:27:45 PM 8:27 PM I didn't know much about effects of debt and income on credit report. Thanks for the nice information it helps to understand so many factors which influence credit history.
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