What You Need to Know About a High Debt-to-Income Ratio?

Do you plan to buy a new car, or perhaps you want to purchase your own home? If you plan on financing any high-ticketed item, it is important to monitor your spending habits and keep your debts low. When it comes to credit and debt, many people carry high balances. Some aren't concern about high debt. In their mind, it's just another monthly payment. Then again, high debts can cause anxiety and keep you awake at night.

Unfortunately, too much debt isn't just another monthly payment. Even if you can afford the minimum monthly payment, and can make on-time payments each month, a high debt-to-income ratio can ruin your credit score.

1. Can't Qualify for Future Credit: Banks and other lending institutions have strict requirements. It doesn't matter if your credit score is 650 or 700, if you have too much debt, a lender might deny your loan request. Prior to approving a loan, lenders look at an applicant's income and credit history. Excessive debt increases your debt-to-income ratio, which is not good from a lender's point of view. For example, let's say you want to buy a new home, but your current debts are more than 40% of your monthly income. A lender may determine that you can't afford the home, or deem you a subprime applicant. Subprime loans include higher rates and expensive fees.

2. High Interest Rate on Future Credit: You can get new credit with a high debt-to-income ratio. However, you'll pay more for the loan. Individuals with high credit card debt typically receive higher interest rates on automobile and home loans. This increases the monthly note, and one missed payment can result in a huge interest rate increase. The best way to keep rates low is to reduce credit card balances. Put off buying a new car or home until you've lowered the balance. A low rate decreases payments, but increases affordability.