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Do
You Have A Healthy Debt Load?
Thinking of purchasing a big-ticket
item soon? Maybe a new car, that fancy
refrigerator you've had your
eye on, or a home? Well, even if you've
paid your bills on time and think
you can swing the payments, you should
also consider your debt-to-income
ratio.
Debt-to-income Ratio
This ratio is calculated by comparing
your income to the total amount of
debt you have. The exercise can be
revealing, especially when you calculate
this ratio regularly. However, waiting
for a lender to do it can generate
less-than-appealing results - if
your debt-to-income ratio is too high,
you will likely get a higher interest
rate and you could even be turned
down for the loan.
The ratio appears as a percentage - the
percentage that the debt is to the
income. A 30% ratio means you use
30% of your total gross monthly income
(before taxes) to pay your monthly
debts. The lower the ratio, the better
your ability to qualify for loans.
Calculating Your Ratio
There are many calculators available
on the Internet to help you calculate
your debt-to-income ratio. To get
a quick sense of your debt load, you
simply divide your total monthly minimum
debt payments (not including mortgage
or rent payments) by your monthly
gross income.
- Your monthly payments include: car
payments, installment loans on furniture
or appliances, bank or student loans,
minimum credit card payments and
medical care payments.
- Your income includes: your paycheck,
any alimony or child support payments,
bonuses, commissions and tips.
An Acceptable Ratio
These guidelines differ depending
on the lender with which you're
dealing. In general:
- 35% or less: This is an average debt
load for most people. If you keep
your ratio around 15%, you're
in great shape.
- 36%-42%: You need to control your
credit spending and work on a plan
to start retiring some of your debt.
- 43%-49%: You could soon face financial
difficulties unless you start lowering
your debt now.
- 50% or more: You may need to seek
professional help to aggressively
reduce your debt load. The National
Foundation for Credit Counseling
offers free assistance to people
who need to get a handle on their
finances.
Remember, if your debt-to-income ratio
looks good and you're ready for that
big-ticket purchase, you should also
check your credit report for any possible
inaccuracies that could impact your
credit rating. |
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