In other words, if you make $2,000 per month, your total monthly debt payments, such as car loan payments, credit card payments, student loan payments, etc. should not exceed $400 per month.
Formula to calculate debt-to-income ratio: Net monthly income *.20= maximum monthly debt.
For example: If a person’s net monthly income is $2,500, then to determine the maximum monthly debt payments, take $2,500*.20 which equals $500. (in this example, no more than $500 per month should be spent on monthly debts.)
Obviously, the less debt you have, the stonger your application, and the better your chances of securing credit at favorable terms.
The key to managing crdit is first establish credit by securing a loan and/or credit card, and second to make payments on time, as stipulated by terms and conditions of the loan or credit card company.
Having credit, both past (paid off loans) and current credit, with payments being paid on time, will provide lenders with the confidence that you handle credit responsibly.
Too many loans and/or too many credit cards, (generally more than four or five) may lead the lender to believe that you are overextended or that issuance of additional credit may cause you to fall behind on future payments.
Also, you do not want to borrow the full line of credit available on any individual credit card. It is better to have credit available on both cards instead of “mixing out” one card and having the full amount of credit available on another.
It is important for both partners in a marriage or relationship to establish their own credit to protect the family from unforeseen circumstances like death, divorce, or other life changes, and to achieve financial goals.
Kinds of Accounts
To ensure that you and your family are protected, find out now what kind of credit accounts you have. You can either check the application(s) or ask your creditor(s). there are two basic kinds of credit accounts.
- An individual account. When you apply for an individual account, only your own income, assets, and credit history are considered by the creditor. Whether married or single, you alone are responsible for paying off the debt on this account. The account will appear on the individual’s credit report.
- A joint account. The income, financial assets, and credit history of both spouses are taken into consideration for a joint account. No matter who actually handles the household bills, both spouses are responsible for seeing that all debts are paid. A creditor who reports the credit history of a joint account to credit reporting agencies must report it in both names.
