What is your debt to income ratio? Take your monthly fixed expenses and divide that by your gross monthly income (before taxes and deductions). The percentage should be greater than 36%, your credit score will be negatively affected because you are considered to have too much debt. This means credit card companies and banks will likely turn down your application if your debt to income ratio is too high. Each lender sets its own policy. Some might only approve your loan if you have a ratio below 30%, while others will accept a higher one. But in general the rule is to keep your debt to income ratio below 36% if you want to get financing.
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To calculate your score, you need to add up your monthly fixed expenses. Monthly fixed expenses include all debt, such as the following: house payment or lease, credit card and other revolving credit balances; car payments, alimony, child support, etc. Do not include grocery, telephone, and utility bills or any debt that will be paid off in the next few months. If your car loan will be paid off two or three months from now, don’t include it in the equation.
Here is a sample calculation:
Gross monthly household income: $5,000
Fixed expenses: $1,600
Debt-to-income ratio calculation:
$1600/$5000 = 32%
The above shows that this persons debt to income ratio is 32%. They need to start paying down his debt rather than accumulating more. Unfortunately, he can probably still get approved for another credit card provided he has a good record of paying his bills on time.