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What is Debt to Income Ratio? Lesson 6

A debt to income ratio analysis (D/I) is a simple mathematical formula that is used by the financial industry to determine the ratio (expressed in percentile) between how much money you are spending verses how much money you have “coming in,” for the sole purpose of either grating or denying you the loan for which you are applying.

 

SCORING:                  

Above 100% :   means that you have more bills to pay than what you are actually bringing home (“take-home-pay”).

100% :   means that you are “breaking even” with no additional monies left over.

Below 100% :   means that your “take-home-pay” is greater than your bills.  You will have money left over each payday (money that the financial institution you are dealing with, will try to get away from you!)

Add up all of your credit card bills, in addition to your creditor obligations you will now list monthly totals in the areas of groceries, dining and entertainment and miscellaneous living expenses such as gasoline for your car.

Once you have listed all of your totals including your current monthly net income (take-home-pay), you are now in a position to figure out exactly where you stand financially.

By using this method you will allow yourself to begin creditor negotiations in the event that your monthly debt exceeds your monthly income.

Let us try an example where your net monthly income (take-home-pay) is $1750.00 but your monthly bills are $2000.00.  to find your debt to income ratio follow the instructions below:

 

On your calculator:

Enter $2000.00    your “total monthly creditor payments”

Press The  ÷  Key

Enter $1750.00     your “monthly net income”

Press   The  %  Key

Result  114.29 %    This is your “debt to income ratio”

If you do not have a calculator, you can just as easily figure this with pencil and paper:  Divide your “total monthly creditor payments” ($2000.00) by your “net monthly income” ($1750.00) and then multiply the result (1.1429) by 100.  You now have your current debt to income ratio of 114.29%.

The previous example means that for every $100.00 you are currently spending you will need an additional $14.29 of income just to break even.  For every $1750.00 you are now spending, you will need an additional $250.00 just to stay afloat.

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Posted by Credit Master - May 8, 2013 at 6:25 am

Categories: Rebuild Credit   Tags: , , , ,