There are so many factors you need to consider before applying for a loan. It is absolutely wrong to apply for a loan when you know you cannot qualify. Why? Because the number of rejections reflected in your credit history negatively affect you. It further reduces the chances of qualifying for loans. So, what are the important factors that you need to consider first? Well, we have already mentioned on –your credit history. With a bad credit history, your chances of being approved for a loan are significantly lower. A poor credit history means you pose a lot of risk to the lenders. What is more, it has a direct impact on your credit score, the main factor that lenders analyze before approving loan applications.
Another important factor for consideration is your ability to pay back. It does not mean that lenders will only approve you your application when you have the ability to pay back the loan. This is a risky business and you know your abilities better than anyone else. Besides, there are lenders who may not pay attention to your ability to pay because they want to attract customers. What are supposed to do in this case? It is important to be rational in your decisions. If you feel you are not likely to afford the loan, then look for other alternatives to y our financial problems because of the inability to pay can worsen your situation. This yet another important factor that lenders will always consider –your debt – to – income ratio (DTI). What is DTI and how does it affect you when it comes to borrowing? We will spend the rest of the time discussing this subject. Pay attention to get the answer to our question of interest
What Is the Debt to Income Ratio for Credit Cards?
What Debt to Income Ration Mean
As one of the main factors that determine your creditworthiness, this is basically the percentage of your earrings consumed by debt payments. It is supposed to be calculated monthly may include the following obligations among others:
- Car loans
- Credit cards
- Student loans
A high DTI is one of the main reasons individuals, including those with very good credit, are not approved for new loans. If you get rejected because of this, you don’t have to simply walk away and leave things that way. This a good indication that your situation is actually getting out of hands. It indicates that you are on in financial distress or else you will be getting there soon. In other words, the ration between your outstanding loans and income levels indicate the likelihood of phasing financial distress in the near future. That is why it is very important that you understand and try your level best to manage this ratio.
How to Calculate Your DTI
Don’t worry if you have a phobia for mathematics. This is a very simple calculation. You first need to find the total of your gross earnings. This includes all your income prior to taxation and obtained from all sources in a month. Find the sum of all your debt payments per month. To get the ratio, simply divide the second value by the first one and multiply the outcome by 100.
When dealing with a credit card, only use the minimum payment, even if you may be paying more. I think it may be easier if we look at a practical case. Let us assume you have an average monthly earning of $6,000 and you make monthly payments of $2000. Take 2000 and divide it by 6000. Multiply the answer you get by 100 to get your debt to income ratio. Let us break it further…
DTI = total monthly payments/ average monthly income; using the above scenario, it will be calculated as follows:
DTI = (2000/6000) x 100, giving 33%
If the ratio is high, it implies a little slack where a small increase in your payments a slight drop in your earnings translates to payment difficulties. If you are actually using half of your monthly income to make payments, there is a possibility that the remaining half may not even be enough to provide for all your basic necessities like food and transport cost. For this reason, taking another loan will make things even more difficult for you and so lenders will be unwilling to approve you for another credit card.
Generally, there is no set limit in order for one to be approved for a credit card. An excess ratio solely depends on the kinds of debt owed. Even so, a lower DTI ratio is very important It is highly recommended that you maintain the ratio below 36%. This is the exact threshold lenders, including credit card companies, look at in order to offer applicants credit with better terms. The ration can be lessened by cutting your monthly payments. Therefore, if it is your goal to lower it, then put concerted efforts in debt payment. Devote any extra coin you receive to settle your debts and try to compare loans online for better terms before applying or check out A1 Credit for reasonable rates and they can advise accordingly.
Let us go back to the question we stated earlier – What Is the Debt to Income Ratio for Credit Cards? Well, the limit is not set. However, it is important you maintain the ratio below 36% in order to obtain credit cards and other loans at lower interest rates and better terms.
The Bottom Line
Debt to income ratio is among the basic factors that lenders consider when evaluating borrowers creditworthiness. It is discouraging to be turned down because of a high ratio. As we mentioned earlier, this can be an indication that you are in financial distress or you are likely to get there. While a limit is not set for credit cards, it is very important to have a lower ratio, probably less than 36%. This is what most of the lenders consider when determining the terms of borrowing. So then work hard to keep low your DTI ratio. How can you do that? We shall consider that in our next article.