In every family income is the necessary fuel to run it, and if you start taking credits, this fuel is divided between household needs and repayment obligations. To manage both the requirements, proper balance between these two must be maintained. So, there is a strict need to keep the debts at a manageable level, because if the debts cross a certain limit, the repayments will become difficult, and ultimately there is a risk of becoming a defaulter. If it happens, your credit score will be short of required level and you will face problems at the time of applying for new loans or advances in future when there will be some real and urgent need. Now the question arises how you can know the limit of debts which should not be crossed to manage your financial matters efficiently. To determine this indicator debt to income ratio comes in to play and it is very important to know about debt to income ratio, for successful management of your finances, and in turn, maintaining your healthy credit score.
Debt to Income Ratio: This is a ratio which arrives by comparing total debt liability to total income on a monthly basis. It may be calculated by simple procedure, just by adding all monthly payments which are made against your debts, for example, monthly credit card payments, car loan installment, payday loan, investment loan, housing expenses such as rent, interest, property taxes and insurance, and any home over association fees, and then divide the outcome by monthly gross income (total income before taxes are paid). This ratio is multiplied by 100 to show it as a percentage.
To understand the process clearly, we may take an example. Say you have to pay every month $400 as your credit card payment, $200 as your car loan installment and $1400 as rent. By adding these all we get a figure of $2000. And if your monthly gross income (income before taxes are paid) is $5000, by dividing 2000 by 5000 we shall get figure 0.4, which when multiplied by 100 will become 40 percent. So in this example, the debt to income ratio is 40%.