Why is a debt-to-income ratio important?

by | May 21, 2021 | Consumer Credit, Personal Bankruptcy |

People can often foster better financial well-being by paying attention to their debt-to-income ratio. This equation marks how much money comes in versus how much goes out. Regardless of how much they earn, many people find it sometimes difficult to pay bills, particularly emergency or unexpected expenses. In fact, despite the government issuing stimulus checks, an estimated fewer than four in 10 Americans at the beginning of 2021 are unable to pay cash for an unexpected $1,000 expense like a car repair or medical bill.

It measures financial health

To calculate the ratio, an individual or family can calculate their total monthly expenses. They then divide the amount of debt by their average monthly income – they can find the amount on pay stubs. This number is then multiplied by 100 to shift the number to a percentage. They can also use this income-to-debt calculator provided by Wells Fargo Bank.

Lower is better

The number that banks look for is 36% or lower if they are going to grant a loan or mortgage. Banks also look at the individual or family’s credit score, but that percentage can still offer insight into financial health. Lowering credit is always a good idea, but so is reducing that debt-to-income ratio.

What if the numbers are not good?

As mentioned, six out of 10 Americans live on thin financial margins, so it common for the numbers to not look great. Depending upon the circumstances, it may make sense to serious actions to discharge the outstanding debt. While filing Chapter 7 or Chapter 13 bankruptcy may not be the right solution for everyone, many have found it the best option to get their debt-to-income ratio down and finances back on track.