Naturally, your credit score isn’t only used to borrow money. Many people are shocked when they learn this simple fact. For example, if you go to a job interview and they employer really likes you and wants to hire you, they may not because of a poor credit score.

Of course, knowing the importance of your credit score is only half the battle. When you understand how your credit score is calculated, that will allow you to make some changes that can increase your score if you need to do that.

Every time you borrow money, in any way, this goes onto your credit score. It doesn’t matter if it is a car loan, or a credit card, it goes on your record. And how well you pay this off also goes on your record. If you pay if off on time, that’s a plus. If you pay if off late or not at all, this is a big negative.

One thing they look at is your debt to income ratio.This is calculated by dividing the amount you have to pay for your bills every month into the amount of your salary. If your debt to income ratio is less than thirty percent, that’s considered pretty good. Anything higher than that, and you are starting to send up some red flags.

It goes without saying that everybody wants to keep a good credit score. And the easy way to do this is to simply pay cash for as many things as you can, and only use your credit cards when it’s an emergency. And keep close tabs on your debt levels, to make sure they don’t rise above thirty percent.

Keeping a good credit report is an important thing. By paying in cash, keeping close watch on your spending, and sparsely using your credit cards, this should be easy.

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Before any loan is approved, your DTI is calculated. This calculation is run because if your DTI is too high, you run the risk of not being able to pay your creditors each month and therefore you will be prevented from adding any additional debt; a person with a high DTI is a high risk consumer.

First take your monthly income; this should include all wages, child support, alimony, annuities, or any other monies that come in to the household monthly. If you happen to have income that varies, you will need to add up the most recent 6 months of wages and get an average of your standard income.

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.

Example:

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

Your Monthly Income = $4000
Fixed Monthly Expenses = $2,300

DTI = 49%

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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