When it comes to applying for credit, your monthly bills may cost you more than you realize. Creditors consider the amount of money you owe on things such as auto, school and credit card loans and may reject your application if they think you owe too much. One thing they're likely to ignore, though, is your cell phone bill.
What Creditors Consider
Creditors evaluate you as a borrower based on your past tendency to repay creditors and your ability to add more obligations to the payments you're making now. Your credit report helps them make this evaluation, as it lists your past and current credit accounts and any late or missing payments. Credit accounts include auto loans, mortgage loans, school loans and credit cards. They do not include your accounts for things such as electricity, cable, or cell phones, as these accounts do not reflect your tendency to repay creditors. Your credit report shows the amount you owe on your credit accounts, allowing potential creditors to determine how much money you owe to other creditors. If a potential creditor decides you should not take on additional debt, they will not approve you for a loan.
Calculating Your Debt-to-income Ratio
Creditors don't just look at how much you owe creditors, they look at your debt relative to your income. Calculating your debt-to-income ratio yourself can save you time applying for new credit. To calculate, divide your monthly debt -- that is, the amount you owe on your credit accounts each month, which excludes your cell phone bill -- by your monthly income. If the answer is higher than 0.5 you may find it difficult, though not impossible, to obtain new credit.
Lowering Your Debt-to-Income Ratio
You can lower your debt-to-income ratio in either of two ways: decreasing your debt or increasing your income. Since increasing your income requires working more hours or finding another stream of income, you may find it more practical to reduce your debt. To do so, lower your monthly expenses such as entertainment, restaurants and cell phone bills to increase the amount of money you have available. Put as much of this money as you can toward paying off your debts, focusing on one debt at a time. Once you pay off a debt, recalculate your debt-to-income ratio.
Lowering Your Cell Phone Bill
While decreasing your entertainment and restaurant expenses can be as simple as forgoing a movie and cooking at home more often, lowering your cell phone bill may not be as straightforward. Contact your service provider to find out whether a less-expensive plan is available, or if you can save money by removing features you don't need from your current plan. When your current plan expires, opt for a pay-as-you go plan from your provider, or switch to a provider that offers prepaid cell phone plans. If you don't need a cell phone, but rather a low-cost phone plan, use a service that allows you to make calls for less than the average phone company charges.
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