Knowing your debt-to-income ratio is essential for good money management

Your debt-to-income ratio can be an indicator of how much pressure debt is putting on your monthly budget. Picture: Freepik

Your debt-to-income ratio can be an indicator of how much pressure debt is putting on your monthly budget. Picture: Freepik

Published Apr 16, 2024


Your debt-to-income ratio can be an indicator of how much pressure debt is putting on your monthly budget.

Debt-to-income ratio is the financial metric that compares your monthly debt payments to your income amount before deductions.

This is according to Wikus Olivier, managing director at CreditSmart Financial Services.

While Ester Ochse, the product head at FNB Integrated Advice, calls the debt-to-income is a comparison of how much money people earn, and how much of that money is going towards paying off existing debts.

Olivier said that the debt-to-income ratio can show how much pressure your debt is adding to your monthly budget and can be handy for credit to make informed decisions concerning debt applications.

“As a rule of thumb, lenders generally seek ratios of no more than 36 percent (%) – the lower your percentage reflects, the better your financial position and the chance of having new credit being granted,” Olivier said.

How to calculate your debt-to-income ratio

– Add up all your monthly debt payments, for example, your vehicle finance, home loan repyment, and unsecured credit like your credit card or personal loan.

– Divide the total above by your total monthly earnings/income before deductions or tax.

– Multiply the total by 100.

– Get your Debt-To-Income (DTI) ratio/percentage

Understanding your debt-to-income ratio

Olivier said that a lower debt-to-income ratio is better when applying for credit because it indicates that you are a favourable borrower of debt while lenders may see you as a riskier borrower if you have a high debt-to-income ratio.

Here are the debt-to-income ratio classifications and tips to understand what your debt-to-income ratio percentage means.

Healthy debt-to-income ratio and low risk: 0 to 29%

A healthy debt-to-income ratio means that you may have a wide range of lending options to consider, and you are likely have money left after paying your bills. Remember to put some money away as savings.

Pro Tip: While you have the right to credit as a consumer it does not mean that you have to take on more debt.

Acceptable debt-to-income ratio and manageable risk: between 30 to 39%

With an acceptable debt-to-income ratio, standard lending terms may apply.

Tip: Be cautious when considering more debt. Focus on your needs and shy away from those wants.

Moderate risk: between 40 to 49%

You may need to improve your credit profile.Think about lowering you debt-to-income ratio to handle any financial challenge that may come your way.

Tip: Pay your bills on time, try to reduce your debt, and cut down on luxury expenses

High risk: between 50 to 59%

If you have a high risk debt-to-income ratio, stricter lending terms may apply, and you may not have much money left to save or manage any financial crisis.

Tip: Avoid taking on unnecessary debt. You should also consider a side hustle to up your income, and reduce your current debt.

Very high risk: 60% plus/and above

With a very high risk debt-to-income ratio, lenders may limit or decline your borrowing options.

You may be experiencing severe over-indebtedness or get phone calls from creditors due to account arrears.

Tip: Communicate with your creditors any changes in circumstances and try to negotiate.

If you have tried to negotiate with your creditors, worked through your budget and can’t seem to cut your debt then a regulated option or professional help can be the route to go. Do your homework then choose a solution to suit your needs.

IOL Business