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An overview of debt-to-income ratio

For most Americans, the balance between the amount of income they earn and the amount of debt they owe is a delicate one. Many people are able to manage this balance in a healthy way, never taking on more debt than they can reasonably be expected to pay back in short order. Others, however, are not so fortunate. Oftentimes, due to unforeseen events and reasons, leave them with poor credit and no way to increase their income.

For creditors and others in the financial industry, this balance between a person's income and debt is known as the debt-to-income ratio. This ratio, which is obviously different for every individual or family, can play a key role in the way a person is perceived by potential creditors.

For instance, if a person has little to no debt, but has a healthy income that has been maintained for several years, that person is likely to be viewed as a solid candidate for a loan. However, if a person has too much debt - be it credit card debt, student loan debt or a mortgage - and that debt is viewed as untenable in relation to the same person's income, that person will likely be viewed as a credit risk.

Of course, there are ways to address a debt-to-income ratio in order to improve this metric in the eyes of lenders and creditors. One way, obviously, is to earn more income. But, probably the best way to address it is to get a debt burden under control by coming up with a plan to whittle down what is owed over time.

Debt relief options are available to those suffering small or major financial problems. Whether it is budgeting, making a financial plan, getting an addition job or filing for bankruptcy, debtors should understand their options so they could take timely and appropriate action.

Source:, "Understanding Your Debt to Income Ratio," Accessed Feb. 22, 2015

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