Do you know how much debt you hold? If you’re holding too much debt in relation to your income, it can be a sign of future financial troubles.
Calculate your Debt-to-Income Ratio
If you’ve added all your income before taxes, you can then divide your total debt to your income to calculate your debt-to-income ratio (or DTI). Your DTI ratio is used by lenders to determine your ability to pay existing debt and if your income can handle another monthly payment.
- Step 1: Add your monthly bills (rent or mortgage payments; alimony; child support; student, auto, or other fixed monthly payments; credit card minimum monthly payments; other debts)
- Step 2: Divide the total of your monthly payments by your monthly gross income (income before taxes).
- Step 3: The result is a percentage called your DTI ratio. The lower your DTI the less risky to lenders.
Additionally, knowing your DTI can help you understand the potential risk you’re taking when applying for a new loan. Keeping your debt at a manageable level is one of the foundations of financial wellbeing.
Want to lower your DTI? Increase your income or pay off debts to reduce monthly payments.