One measure of how you are doing with debt is to look at your debt to income ratio, often referred to as the DTI ratio. To determine this, you take your monthly payments toward debt – mortgage payments, credit card debt, car payments, etc. Add them all up, then divide it by your net monthly income. That percentage is your DTI Ratio. Some experts say that this ratio should be less than 35% (others give slightly higher or lower figures). The lower the number the better.
Lenders look at this number to determine your ability to handle your debt payments. Even if your credit score is high, if your DTI ratio is too high you may be denied a loan. For me, my DTI ratio is 19.2%, which is pretty healthy. If I needed to (which I don’t want to), I should be able to get a loan fairly easily and at good terms (especially linked with a high credit score).
Another good reason to have a low DTI is that if something happens to your income stream, you will have more flexibility in cutting back your spending. Having options in budgeting is always a good thing.
If you are having trouble making ends meet, one reason could be that your DTI ratio is too high. If more than 40% of your income is going to pay off debt, that leaves you with very little to pay for everything else. This would be one indicator that you need to tighten your belt and pay off some of that debt.
