When applying for credit in the form of a loan, line of credit, mortgage or credit cards, your debt ratio is one of the many criteria used to assess you. It is important for you to know what this is, how it relates to your borrowing power, and what you can do to improve your debt ratio.

Many individuals may not know what a debt ratio is as it's not something often discussed in terms of debt management. Your debt ratio can be defined as the account of total debt payment you have compared to your total income. This is expressed in the form of a percentage. It can be interpreted as a proportion of a person's gross income that is being used for paying off debt. 

This number will tell the bank or lending institution that you have gone  for a loan or other form of credit whether you are capable of paying them back or not. If this number is too high, you can almost guarantee that you won't be given the loan or credit you have applied for. Many banks require 42% or lower depending on the credit score of your credit bureau. 

Here's an example: If you make $3,500 in monthly gross income and have monthly debt payments of $1000.00 (including minimum payments on credit cards, loans, and/or mortgages), then your debt ratio will be 28.6%. The lower this number is, the better it is for you. 

Solution: To lower this number, you must reduce your monthly payments on debts. This is where Finances 123 Inc can help. We are experts at finding the right solution to suit your specific and unique financial situation. We have worked with hundreds of individuals throughout the country in helping them reduce their ratio, while reducing stress for them personally and their families.