Owing creditors money can improve your chances of getting a loan, but only if it's what creditors consider a reasonable amount of debt. A reasonable amount is one that allows you to make payments on time and in full in addition to managing your other expenses. Creditors primarily use three calculations to determine whether this is possible in your financial situation.
Debt-to-Income Ratio
The amount of money you have to cover regular expenses is a fair indication to creditors of how much money you can spare on new debt payments. So, they divide the total of your current monthly debts by your monthly income to determine how much money you have available after your obligations to creditors. If you have a $50 credit card payment, a $200 auto loan payment and a $3,000 monthly income, for example, your debt-to-income ratio is 8.33 percent. Since 36 percent is the maximum ratio creditors usually accept, by this standard you should have little difficulty getting new credit.
Housing Expense Ratio
Housing accounts for a large portion of monthly expenses for many people, so creditors may ask how much you pay in rent or mortgage payments each month. Ideally, this amount should not be more than 28 percent of your monthly income. Housing expenses can include: rent or mortgage, property taxes, homeowners insurance and mortgage insurance.
Debt-to-Credit Ratio
The amount you owe on your credit accounts is almost irrelevant to creditors out of context. What matters to them is how much you owe relative to your credit limits, much like your total debts only matter in relation to your income. Maxed-out credit cards, for example, indicate to creditors that you may not have enough money to reliably make payments on a new account. They prefer you to have a debt-to-credit ratio no higher than 50 percent. So, if you have three credit cards with a credit limit totaling $10,000, the sum of the amounts you owe on the cards should not exceed $5,000.
Personal Comfort
Creditors' calculations don't always capture the full picture of your financial situation. If creditors consider you to be in top financial shape, yet you struggle to meet expenses, then your debt may be unreasonably high for your situation. If this is the case, find ways you can reduce your spending to increase the amount of money you have left over every month. Avoid opening any new accounts until you can comfortably manage the ones you currently have.
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