Lenders often determine an individual’s creditworthiness by looking at that person’s debt-to-income ratio. If the ratio is considered acceptable, it’s more likely that lenders will make the loan. Calculating the ratio can provide insight into the state of your financial health. Here’s how to calculate your ratio.
Start by adding up all of your monthly debt obligations — mortgage, auto, and other loan payments, as well as minimum credit card payments. Next, divide that amount by your gross monthly income. That’s the amount of money you earn before taxes and other deductions are taken. Income generally includes your pay, investment income, and self-employment income.
If you multiply the ratio by 100, you’ll get the ratio as a percentage. If your ratio seems high, it may be time for you to take some action to lower it. Paying down credit cards or other debt is a good starting point.