When to Buy on Credit— And When Not To
When to Buy on Credit— And When Not To
And When Not To
THE DEBT-TO-INCOME RATIO:
You know how much your income is.
You know your basic expenses. But
when planning your next credit purchase, how much of a payment can you afford?
It helps to
have a guideline you can use.
Debt-to-Income Ratio shows you what portion of your monthly income is already
spent on other debts. The lower your
debt-to-income ratio, the easier it is for you to afford. .
HOW TO FIGURE YOUR DEBT RATIO
Step 1 –
up your regular monthly debts.
of the rent or mortgage payment
payments on credit cards (even if you normally pay more than the
minimum payment, list only the minimum).
Loan payments, including those you
have co-signed (even if you’ve never had to make a payment)
Do Not Include:
utilities, insurances or cash purchases.
rent or mortgage payment (your share)
$________ car payment
$________ student loans
major credit cards
department store cards
doctor & dentist
TOTAL MONTHLY DEBTS
Step 2 – Monthly Income:
Total your regular, reliable income. If
you are employed, use your take-home (net, after-tax) pay, not including
commissions or overtime. If you are self-employed,
your average monthly after-tax income.
If you use income tax returns to summarize various income sources, use
your adjusted gross minus federal and state income and self-employment
taxes. List, too, income from
federal, state and local government agencies, such as social security,
veterans’ benefits, Temporary Assistance to Needy Families (TANF).
Be conservative when using income
from investments and rentals.
Sources of Income:
AVG. MONTHLY INCOME
Step 3 – Figure your debt ratio:
total monthly debts by your regular income.
debts (from Step
1) ÷ $1,000 avg. monthly income (from
Step 2) = 0.50 or 50%
PLANNING YOUR NEXT PURCHASE
Step 4 – Learn About the New Payment
it’s a store or a credit card company, contact them to ask, “If I make a
purchase costing $______ how much more per month will I pay?”
If you’re considering an installment loan from a financial institution, contact them—or use their Web site—to obtain the answer this question: “If I borrow $_________@ __% Annual Percentage Rate, for ___ months, how much will my monthly payments be?” Or, look up their rates on their Web site and estimate your monthly payment on our Payment Calculator: paste the link below into your browser or click on it:
Step 5 – Compute
Your New Debt Ratio
Where the dollar amounts are under “Step 1” above,
add to your current payments the new payment you want
to make. Divide your new total debts by your current income to see how it will affect
When planning your next purchase,
use only income that will be reliable and consistent throughout the
repayment period. A 4-month
work-study job won’t help you repay a 36-month loan.
If you are—or were—in school,
be sure to add to your debts any
student loan payments that will begin within a few months of graduation
What’s a Good Debt-to-Income Ratio?
We recommend the following goals:
Try to spend no
more than 25% to 35% of your regular net (after-tax) in-come on
your share of housing
Try to spend no
more than 15% of your monthly income on loan payments and credit card payments combined
Try to keep the
total of all debts no higher than 40% to 50% of your monthly income.
If you have one or more dependents, aim to keep them even lower.
If your debts are over 50%, watch
them. If you’re nearing 60%, you
could be in trouble:
time to cut them. Certainly
don’t add new ones.
Which Ratios Do Lenders Use?
lenders use different methods and standards to calculate your ability to afford
a payment to them.
Some look at your monthly income, some at your annual.
Some consider your take-home pay or net; others use your gross
A lender may calculate your consumer debts with your rent or
without it. Some add to your
expenses an arbitrary standard amount from a chart or their software to
cover food, clothing, and entertainment. Instead
of basing their decision on your debts, they may base it on the amount of
money that’s left over when subtracting your debts and “standard” expenses
from your income. They may call the
amount that remains your “disposable income.”
With your current expenses and income, one lender may approve your
request, a second deny it, a third make a counter offer!
If a lender considers your bills too high, they may turn you down for
“insufficient income.” If so,
you may want to re-apply after you’ve
reduced your rent or paid off an
existing loan or credit card.
Some Ways to Reduce Your Debt Ratio:
1. Housing: Add a housemate to your home or
rent a room in someone else’s home or refinance your mortgage or
move to a less expensive residence or become a resident manager for
an apartment complex or become a live-in companion for someone who needs
help with daily tasks.
2.Transportation: reduce the
number of cars in your household or move closer to work or move
closer to public transportation or car pool (you need not own a
car to ride in a car pool!) or sell
your new car and buy a used one (every April issue of Consumer Reports lists
used cars with better reliability records).
Look up local listings & Web sites to help with your commute:
3. Credit Cards: if you buy
more on them than you need, cut them
up and send them back. Then
Consumer Credit Counseling
Services (CCCS), a legitimate,
non-profit organization subsidized by lenders.
They don’t lend money.
They offer free budget help. For
a small monthly fee, they contact lenders for
you, to try to reduce your monthly payments and/or interest charges so you
can afford to pay the debts you have.
You then give CCCS one check per month;
they send out checks to your
1 (888) 298-CCCS (2227) cccssdic.org
Money Management International
(MMI): merged w/CCCS. They give online
counseling during extended
hours: Tel (866)
if you use credit cards compulsively.
4. Request one or more of these articles or
work-sheets, free to members of Women’s Southwest:
to Live on Less
to Shop for Mortgage Loans
to Save More of Your Money [note:
many financial planners recommend that you save at least 5-10% of
to Pay Less for New and Used Cars
Better Credit Qualifications =
Plan (and how to keep a diary of
Simplifier Accounts: use
these Women’s Southwest “sub-accounts” to set aside money for recurring
expenses such as estimated taxes, property taxes, car insurance, vacations,
& gifts. You may have up to 9 such accounts on your regular statement.
From one deposit to WSFCU, we’ll distribute $ to your various
WITH ANY QUESTIONS YOU MAY HAVE
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