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Is your debt-to-income ratio too high?

If you want to buy a house, fund your education or secure other types of financing, you probably need a good credit score. According to the credit reporting service, Equifax, a good credit score is anything between 670 and 739. A score over 800 is excellent. 

While credit reporting bureaus use a sophisticated algorithm to determine your credit score, your debt-to-income ratio is an essential part of the calculation. The U.S. Consumer Financial Protection Bureau notes that any debt-to-income ratio over 43% may make it difficult to obtain a mortgage or acquire other loans. 

How do you find your debt-to-income ratio?

Your debt-to-income ratio simply compares how much debt you have relative to your income. To calculate your ratio, you first must add up your monthly expenses. When doing so, be sure to include everything you pay during the month. 

After adding together all your debt, divide the sum by your gross monthly income. This amount, which should appear on your regular pay-stubs, is how much you earn before taxes. To turn the quotient into a percentage, simply move the decimal two places to the right. 

For example, if your monthly expenses are $2,000 and your gross monthly income is $4,000, your debt-to-income ratio is 50%. 

How do you improve your debt-to-income ratio?

You probably have a couple options for bettering your debt-to-income ratio. First, you may be able to increase your income or to lower your monthly expenses. If neither seems particularly feasible, you may want to explore bankruptcy protection. 

When you file for bankruptcy, you discharge many of your outstanding debts. If your income remains consistent while your debts effectively go away, your debt-to-income ratio should improve consequentially.