Your debt-to-income (DTI) ratio is a measure of the total monthly cost of your debts compared to your income. Banks and other potential creditors often look at the borrower’s debt-to-income ratio when making loan decisions. Lenders use the debt-to-income ratio as an indicator of your ability to repay debt. You are considered credit-worthy if your debt-to-income ratio is low. The higher the ratio the more of a credit risk you become. Most banks and financial professionals agree that you should keep your debt-to-income ratio at less than 36% of your gross income.

How do I calculate my debt-to-income ratio?
Your debt-to-income ratio is calculated by dividing monthly minimum debt payments by monthly gross income (income before taxes). The first step in calculating your debt-to-income ratio is figuring your monthly gross income, which is your income before taxes or other deductions. The following counts as income:

• Your paycheck or business income
• Regular income from alimony and child support
• Include conservative averages of bonuses, commissions and tips
• Dividends and interest earnings
• Include miscellaneous income such as government benefits and/or assistance

Next step is to figure out you debt amount. The following counts as debt:

• The current minimum payment on all your credit purchases and loans
• Mortgage or rent
• Car payments, installment loan payments on furniture and appliances, bank/credit union loans, student loan payments, other loans/credit lines, all minimum credit card payments, and payments for past medical care

Your Debt-to-Income Ratio is calculated as:
Monthly Gross Income / Total Debt Payments = Debt-to Income Ratio

Why is monitoring my debt-to-income ratio important?
Knowing your debt-to-income ratio will help you make sound decisions about making purchases on credit or taking out loans. Keeping your debt-to-income low will help you avoid major credit problems.

Letting your debt-to-income ratio rise will jeopardize your chance of making major purchases, such as a car or a home, when you desire. Also, if your ratio is high, you will find it difficult to get additional credit in case of emergencies. As a bonus, if you keep your debt-to-income ratio low, you will more likely qualify for the lowest interest rates and best terms when you apply for credit.

How to lower your Debt-to-Income ratio?
There are two ways to lower your debt to income ratio. The first is to increase your income. This can be achieved getting temporary overtime work or get a second job till your debt is paid off. You could also try to look for a higher paying job. Review your return on investments and talk to your financial adviser to possibly reallocate your investments funds so as to get a higher return.

The second option is to reduce debt. This can be achieved by implement cost saving measures. The best place to start is by implement a budget and making smarter purchase decisions. Other debt reduction options are taking out a Debt Consolidation loan, Retirement Plan loan, Consumer Credit Counseling, and Debt Settlement.