Having an excessive amount of credit, including many credit lines, or multiple large debts make credit repair more difficult. Excessive credit is essentially a debt load that you can not easily pay off. Even if you are currently able to consistently pay your bills, but have a high debt load, lenders know that if anything out of the ordinary happens you will find it difficult to make your payments. In order to maintain a strong credit score, as well as financial security, it is a good idea to maintain a reasonable debt to income ratio.
The best credit repair companies will assist you to get the correct income and debt ratio. The payment is possible according to the needs and requirements. A financial security is provided to the people to maintain good ratio of income and debt. There are many benefits provided to the individuals in calculation of the ratio.
What Is The Debt To Income Ratio?
Your debt to income ratio is a measurement which compares your income with the amount of money you owe your creditors. Lenders generally agree that a 36% debt to income ratio, with no more than 28% allocated to mortgage repayment, is a reasonable level. A ratio of 37-40% may still be low enough for you to take out loans, however even if you are offered good terms, this does not mean that you should accept it.
With that said, many people are now living in the 41-49% range. This is a very dangerous zone to be in as any small financial upset can have a very negative impact on your financial well-being.
Debt To Income Ratio Calculation
Calculating your debt to income ratio is not difficult. There are two ways you can do this calculation, depending on which debts you include in the calculation. This can be done using your gross income (income before taxes), but it is advisable to use your net income (income after taxes) in these calculations.
Your browser does not support iframes.
Option 1: Calculate All Housing Debts
This includes your taxes, home insurance, mortgage payments and other housing related expenses. Once this is calculated, divide it by your net monthly income. For example, if you make $3,000 per month and your mortgage payments are $600, taxes are $280, and insurance is $200, your debt to income ratio will be 36%.
Monthly Income ÷ Housing Related Expenses = Debt To Income Ratio
Option 2: Calculate Total Money Spent To Service Debt
This is a more comprehensive method. You compare all money spent each month to service debt. This includes recurring debt such as credit card payments, mortgage payments, car loans and child support payments. Do not calculate monthly expenses such as utilities, food and entertainment.
Monthly Income ÷ Total Money Spent To Service Debt = Debt To Income Ratio
Having Some Debt Is Good For Your Credit Score
However, it is important to realize that having no loans and no debt will not improve your credit score. It is wise to only have a few credit cards, and a few major debts in order to achieve a strong credit score. Only take out loans when truly necessary (such as for a car or home), and make sure that you pay off your debts on time. Additionally, opening many new credit accounts, or even applying for multiple new lines of credit, makes you look financially irresponsible and will lower your credit score.