One of the main reasons why many Americans look to bankruptcy and other measures of debt reduction to clear their name from this debt is because statistically as a country we have a very high debt to income ratio; sometimes way over 50% per household. This ratio can prevent people from obtaining financing, establishing credit, and can also get you in a major bind with many of your own creditors. You can calculate this by taking the percentage of the debt you have versus how much income you bring home.

Before any loan is approved, your DTI is calculated. This calculation is ran because if your DTI is too high, you run in the risk of not being able to pay your creditors each month and therefore you will be prevented from adding any other debt to your report; a person with a high DTI is a high risk consumer.

First take your monthly income; this should include all wages, child support, alimony, annuities, or any other monies that come in to the household monthly. If you happen to have income that varies, you will need to add up the most recent 6 months of wages and get an average of your standard income.

Next, you will have to calculate all your debt; this includes the payments you make monthly on all outstanding balances. Do not include your utility bills, just your credit cards, car payment, mortgage, child support, personal loans, and any business loans. If you know that any of these balances will be paid off within 3 months, do not include it. Lastly, divide your monthly expenses by the monthly income and you will calculate your debt to income ratio.

Basically it’s money that is brought into the household. If your income is inconsistent from month to month, then the lender is going to want to see the last six months of averaged standard income.

Your Monthly Income = $4,000
Fixed Monthly Expenses = $800

DTI = 20%

Example:

Another Example:

Your Monthly Income = $4000
Fixed Monthly Expenses = $2,300

DTI = 49%

This debt to income ratio is very poor and shows that expenses are so high that it would be very difficult to gain any additional credit or financing.

The first step of debt reduction is always taking a look at where you currently stand, and that is through obtaining your debt to income ratio.

Want to find out more about Smart Debt Repair, then visit Lisa Max’s site on how to look out for debt consolidation scams and various debt repair tips.