By Patty McDonald
Special to GUIDON
If you have ever applied for a major loan such as for a new home or car, you probably heard the term debt-to-income ratio, or DTI. Did you understand what that meant?
DTI is a measure of your personal finances that compares the amount of debt you have monthly to your overall income. Lenders, including issuers of mortgages and car loans, use it as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed or wanting to borrow.
Your DTI is calculated by your total debt, divided by your total income. This includes recurring monthly bills such as mortgage or rent, student loans, auto loans, child support and credit card payments.
For example, if your debt is $2,100 per month, and your monthly income equals $6,200, $2,100 divided by $6,200 equals 33 percent, which is your DTI
This means 33 percent of money you make every month goes toward bills.
So what is considered a good DTI? A ratio at or below 36 to 40 percent is generally considered what you should strive for as part of your overall credit health, and to keep you from having financial problems.
Good DTI scores improve your chances of getting lenders to want to lend you money or issue lines of credit.
There are really only two ways to lower your DTI: reduce your monthly recurring debt or increase your monthly income. For most, unless you get a new job or get a second one, reducing debt is the more manageable option. So how do you do that? Take the following actions:
— Increase the amount you pay monthly toward your debt as extra payments can help lower your overall debt more quickly. Pay more than the minimum due. Once you finish paying off one bill, take the amount you were paying on it monthly and apply it to the next bill you want to pay off.
— Avoid taking on more debt. It is tempting for most people to want to buy a new car when they have paid off their current one, but if you have a vehicle that runs well and you have kept up with routine maintenance, try to hold off until you truly can afford it comfortably.
— Postpone large purchases so you’re using less credit.
— Recalculate your debt-to-income ratio monthly to see if you’re making progress.
It is never too late to improve your DTI, but it is all up to you. Make yourself a budget and commit yourself to following the actions needed to reduce your debt. If you have a partner that you share expenses and income with, you must commit together to keep your finances healthy.
To get started, contact Army Community Service’s team of financial counselors at 573.596.0212.
(Editor’s note: McDonald is an Army Emergency Relief specialist.)