Your debt to income ratio is important to your overall credit score. Spending more than you earn results in a high debt to income ratio, lenders see you as a higher credit risk.

How is the debt to income ratio calculated?

Take your net worth and your total Debt. Your net worth is comprised of your monthly net pay, overtime and bonuses and any other annual income you have. Your total debt includes mortgage loans and any other loans, car payments, credit cards, revolving loans or child support / alimony you may be paying each month. Divide your total monthly debt payments by your monthly income. A debt to income score of less than 36% is considered healthy, anything less than 30% is considered excellent. 36%-40% doesn’t mean you won’t be able to get a loan, but you will have a harder time meeting monthly obligations. Anything over 40% and you really need to work on destroying your debt.

A common culprit.
Credit card debt has a major impact on your debt to income ratio. What you owe on your credit cards can make or break your credit score. If your debt exceeds your income, your credit score suffers. Reducing credit card debt is essential for improving your credit score and debt to income ratio.

If you are trying to obtain financing…

Aim for a debt to income ratio of 36% or less. I you have credit cards with very low or zero balances, try to transfer any outstanding balances to the lowest interest credit cards you have. Avoid closing down accounts, because having available, unused credit is favorable (your debt to credit ratio) and this can help you. Keep in mind, if you have dependents, you should ideally have a debt to income ratio of around 20% to ensure you can meet your debt payments each month with a bit of wiggle room for unexpected expenses.