Debt To Income Ratio And The Effect On Your Credit Rating
The debt to income ratio also known as DTIR is calculated using the payment you pay towards your total debt as a percentage of your total gross income. Lenders use the ratio to determine how much you can borrow based on payments such as insurance, property tax, unsecured financing etc.
How To Calculate Your DTIR:
The ratio is expressed as a percentage, and can be calculated by dividing your monthly payments on your long term debts by your gross monthly income.
As a working example, if your total debt payment stands at $1375 per month and your gross income is $3125 per month, to calculate your percentage, divide $1375 by $3125. This would give you a DTIR of 44%.
According to mortgage news daily the recommended acceptable ratio is 35%. This is broken down into two parts, 25% for home related expenses and 10% for all other expenses.
Keep A Low Debt To Income Ratio:
Having a low DTIR is important as your ratio is used to determine your credit worthiness. A lender would hesitate to lend to you if your ratio is high as it would indicate that you may have trouble paying your debts in the future. This could be problematic when it comes to purchasing major items such as your home.
When your DTIR is high, you do not attract the lowest interest rates on credit cards and other credit facilities; this is because the lender sees you as a default risk and would charge you a higher rate to protect their business.
Managing Your Credit Card Debt To Reduce Your DTIR:
A major expense that contributes to your DTIR percentage is your credit card debt. If your ratio is near or above the acceptable limit, then you must take action to reduce it. The following tips would therefore be useful to you.
1. Approach your credit card provider to get a reduced interest rate. You would need to meet the lenders criteria such as having a good credit rating, prompt bill payments etc. in order to qualify, but it is worth looking into.
2. Use your credit card for necessary purchases only. Charging all your day to day purchases on your credit card pushes the balance and your minimum payment up. This would adversely affect your DTIR as the debt payment increases, especially if your income remains the same.
3. Avoid extra charges, by paying your bill on time, every time. Stay within your limit at all times. To achieve a lower ratio; you must work at reducing your monthly expenses.
Debt reduction takes self control and sacrifice, but in the end, with reduced debts, you would have less monthly expenses and a lower debt to income ratio. This would open up the market for you to access financing for the larger necessities in life at a much better interest rate than you would if your rating were not in good standing.
Anthony Samuel
http://www.articlesbase.com/non-fiction-articles/debt-to-income-ratio-and-the-effect-on-your-credit-rating-98686.html
What is the effect on my credit score if a loan is reported as joint instead of co-signed?
I need to improve my credit score within a six month period in order to refinance my home at a better rate than the one I currently have. My loan to income ratio is high because I am single and on a fixed income but live with my boyfriend who has income, but no credit. Specifically, we signed for an auto loan together hoping for a better rate even though it was purchased with the intension he would be making the payments from his pay. I prefer to remain on the title, as it is, because I provided the down payment. The problem I have now is that on my credit report this auto loan adds an additional and hefty liability to my already stretched debt to income ratio. Any way to improve this outlook for my credit score? One reporting agency shows the loan as a "joint" account, the other as a "co-signed" loan. Do they effect my score differently? It has created stress between us because if he pays late, it's reported on my account. Any ideas besides selling or splitting up?
It won't make much difference. It's a liability to you either way. Your loan to income ratio doesn't affect your credit score although it certainly will affect your interest rate and even qualification for a loan.
References :
Speaking as a nationally known credit score and lending expert (book, radio shows, newspaper columns, etc.)…
I review a LOT of credit reports. The credit reports with adequate detail will list either type of account as "Joint" the way you describe it. That will be the same either way.
An "Authorized" account will not raise credit as much, thanks to a July 2006 change in how credit scores are calculated.
BUT when you have a Joint account, for home loan purposes, you RAISE your debt ratio by taking on a Joint account.
Creditors are extremely unlikey to allow a co-signor off. They get to collect from two people instead of one in case of defaluted loan.
Maybe you can just refinance the car? If you are not upside-down.
References :
Pookie,
Let's keep this realer than real.
I consistenly find women trying to create a budget to work for a man that has a job, but for some odd reason doesn't have ANY CREDIT or worse, jilly-jacked up credit.
Why are you going to all of these crazy financial arrangements to shelter HIM from the rain?
If he can produce bacon, then why can't he make the car payments on time? Please note that you said the car was purchased "with the intension that he would be making the payments from his pay".
What the heck do you mean intention?
Either the man PAYS the car note or he doesn't. You can never pay a car note based on GOOD INTENTIONS — you pay it with legal tender — that is CASH — NOT tired a$$ excuses.
Here's the real scoop!
You got your man to get onto this car note because you KNEW that your fixed income ALONE would not allow you to qualify for and purchase the vehicle that you wanted — especially when you already have a mortgage.
So you figured if you could get your less financially responsible, income-producing boyfriend to sign the auto loan with you — you would qualify for the loan, get the car, and you could help improve his credit situation at the same time.
As a show of good faith, you put the down payment on the vehicle because quite frankly, your Boo ain't got that kind of credit or cash! But I am sure he has a lot of good intentions, though!
Problem == There is a reason your boyfriend has NO CREDIT/BAD CREDIT. He doesn't pay bills on time!
Now you want to change the nature of the loan agreement. But guess what, your BOO doesn't have enough credit to convince a creditor to remove YOU from the loan agreement. The creditor KNOWS you got fixed income, so they want you to remain on, in case your boyfriend continues to be trifling (delinquent) with his payments.
So, in this scenario, your best bet is to do what you have been avoiding altogether — SELL THE CAR since your boyfriend is STRUGGLING to begin with — this will restore your debt to income back to where it should be.
Second, there will be no late payments on the auto loan since you aren't relying on your less-than-financially responsible boyfriend. This will help your FICO score as well!
Third, you don't have to argue with your man about stuff he is ill-equipped to handle!
I just hope the vehicle's fair market value is MORE THAN the loan amount. It would be a "hot mess" if you were already "upside down" in the auto loan.
Finally, stop trying to fix your man's bad credit — he needs to get HIS OWN CREDIT on his own terms ON HIS OWN TIME! Leave credit rehabilitation for the PROFESSIONALS.
References :
CPA.
Weather a loan is reported as joint or co-signed makes no difference as far as your credit is concerned.
The only way to get this out of your name is for your boyfriend to refinance the vehicle is his name only. After he has made 18-payments as long as they were made as agreed, he should be able to do this.
References :
Auto finance manager for over 7-years.