Whether you are struggling to pay your monthly bills or simply want to better manage your debt, you should know your debt-to-income ratio. Not only does this percentage tell you how much debt you have relative to your income, but it plays an oversized role in your credit score.
If your debt-to-income ratio is too high, you may want to explore bankruptcy protection or other financial options. Calculating it, though, is the first step to improving your financial position.
Finding your debt-to-income ratio
Finding your debt-to-income ratio is simple. First, you must add all your monthly financial obligations, including mortgage or rent, utilities and student loans. Then, you divide your monthly debt by your gross monthly income. This is the amount you earn before taxes.
Understanding your debt-to-income ratio
Gauging whether your debt-to-income ratio may be too high can be a bit like reading tea leaves. That is, what constitutes too much debt likely depends on your financial goals. Still, according to the U.S. Consumer Financial Protection Bureau, any debt-to-income ratio above 43% is likely to make securing a mortgage exceedingly difficult.
Improving your debt-to-income ratio
Even if you have considerable debt, you probably have a few options for improving your debt-to-income ratio. If paying down your debt and increasing your income are not realistic, you may want to consider taking advantage of bankruptcy protections.
When you file for bankruptcy, you discharge many of your outstanding debts. If your income stays the same or increases, your discharged debts are likely to improve your debt-to-income ratio.