Whether you’re looking to borrow money, manage your cash flow, or reduce your debt, understanding your debt-to-income ratio will give you a better idea of where you stand financially. Your debt-to-income ratio can also serve as a useful way for you to gauge your comfort level with your current debt level and/or ability to borrow more.
This ratio can be found by comparing your total monthly debt with your monthly income. Learn how to calculate this ratio, its affects, and how to improve it.
How to calculate your debt-to-income ratio
To calculate your debt-to-income ratio, you add what you owe each month – like your monthly housing payment, credit card payments, student and other loans – and divide that total by your monthly income before taxes. Expenses like groceries, utilities, gas, and your taxes (since you’re using your pre-tax income) generally aren’t included. Consider creating a worksheet to help determine your debt-to-income ratio.
Understand its impact
Your debt-to-income ratio is important to lenders because the level of your debt relative to your income can be a key indicator of your ability to repay a loan. Wells Fargo will look at this ratio before granting you a loan. Their evaluation of your debt-to-income ratio is meant to help you determine whether you’re comfortable borrowing and if the monthly payments can fit into your current budget.
To keep track of your income and debt, consider organizing your finances online. Wells Fargo’s Online Banking and Bill Pay allow you to easily set up payments, transfer funds, and manage your accounts to smoothly navigate your finances, including debt.
Improve your debt-to-income ratio
There are ways to lower your debt-to-income ratio. To start, consider which debts you want to pay down, starting with your highest interest loans. Developing a budget and revisiting your spending will help you keep careful tabs on your finances so you can reduce your debt. Consider using Wells Fargo’s My Spending Report with Budget Watch to monitor your spending and ensure you’re budgeting enough of your income toward reducing your debt.
Your debt-to-income ratio is an important personal financial indicator. By taking the time to calculate and fully understand it, you’ll be able to make informed credit choices and create a plan you can use to meet all your financial goals.