One of the main reasons why many Americans look to bankruptcy and other measures of debt reduction to clear their name from this debt is because statistically as a country we have a very high debt to income ratio; sometimes way over 50% per household. This ratio can prevent people from obtaining financing, establishing credit, and can also get you in a major bind with many of your own creditors. You can calculate this by taking the percentage of the debt you have versus how much income you bring home.

So how can we as whole get better with debt reduction? Having a high DTI can be a deterrent for many creditors and finance companies to want to give us any kind of chance of having credit or financing. Taking a look at your DTI involves you taking the percentage of debt versus your income.

Getting a loan approved involves having the lender calculate your debt to income ratio to show how much risk you are as a consumer. If you DTI is higher than the norm, this shows the company that you are high risk and may run into the problem of not being able to pay the creditors back in time.

Next, you will have to calculate all your debt; this includes the payments you make monthly on all outstanding balances. Do not include your utility bills, just your credit cards, car payment, mortgage, child support, personal loans, and any business loans. If you know that any of these balances will be paid off within 3 months, do not include it. Lastly, divide your monthly expenses by the monthly income and you will calculate your debt to income ratio.

Your monthly income is the first thing that needs to be determined to start this equation. Your monthly income can include child support, alimony, benefits, annuities, and your monthly wages; this will include all income that comes into the household on a monthly basis. If your income is different on a monthly basis then the lender will calculate the last six months of standard and averaged income.

The next thing to be calculated is the debt you have incurred. Debt does not include any utility bills, but it will include credit card balances, mortgage, child support, business loans, personal loans, the car payment, etc. Do not include it if it will be paid off within three months.

Finally, go ahead and divide your monthly expenses by the your monthly income. This will give you the debt to income ratio.

Example:

Monthly Income = $3500

Fixed Monthly Expenses = $1700

DTI = 58%

This debt to income ratio is very poor and shows that expenses are so high that it would be very difficult to gain any additional credit or financing.

The first step of debt reduction is always taking a look at where you currently stand, and that is through obtaining your debt to income ratio.

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