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Understand Your Debt-to-Income Ratio or Creditworthiness
One measurement in your FICO score compares your debt payments to your income. This measurement is important because it gives lenders an idea of how likely you are to make your payments. The higher this ratio, the more difficulty you will have in making payments. Also, if the ratio is too high, you will have a hard time getting other forms of financing.
Your Debt-to-Income Ratio is the percentage of your monthly pre-tax income that is used to pay off debts. Lenders look at two ratios:
Debt-to-Income Ratio is Calculated By:
Monthly Debt Expenses ÷ Monthly Gross Income = Debt-to-Income Ratio
Here’s an example of this calculation:
A Good Ratio
Most banks and financial professionals agree that you should keep your debt-to-income ratio at less than 36 percent of your gross income.
If your debt-to-income ratio exceeds 36%, you may have trouble finding affordable credit. However, many lenders also evaluate other circumstances and may still have a loan to offer that fits within your own personal situation.
Calculate Your Debt-to-Income Ratio
Now, calculate your own debt-to-income ratio. To do this:
Things You Can Do To Lower Your Expenses
Set up an automatic bill paying system.
This will ensure that you pay your bills on time and minimize charges for late payments, which cost you money. For bills that do not have an automatic payment option, pay them when you get paid. This way you will minimize the risk of spending the money you should have used to pay your bills.
Use a debit card and not your credit card
Using a debit card ensures that you only spend money that you actually have. Since the money comes directly out of your checking account, you will tend to be more responsible with the purchases than you would be with a credit card.
Do it yourself
Wash your own car, do your own gardening or lawn mowing. Clean your own carpets or groom your dog yourself. There are many things you can do that will save money.
Shop around before you buy
Never impulse buy. When you need to make a purchase, it is important that you get the best deal for your money. There is a lot of competition in the market and companies are doing everything they can to attract customers and increase their sales. Find these offers and take advantage of the savings. Bargains can be found all over – from the grocery story to the car dealership. You will be truly amazed at how much savings you’ll get if you shop around first.
Start a savings account
If you don’t already have one, start one right away. It is needed for emergencies and unexpected expenses such as car repairs or an emergency room visit. You will reap the reward of not needing to borrow money or use your credit card. And over time, you will earn dividends that you wouldn’t have otherwise.
Click to find out how to get your free credit report.
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