Before applying for a mortgage, car or personal loan, you need to know if you earn enough income every month to pay back your new debt. Fortunately, there is an easy way to do this: You just need to calculate your debt-to-income ratio. Debt-to-Income Ratio Lenders will calculate this ratio every time you apply for a loan. They do this for a simple reason: They want to make sure that you will not be so overwhelmed with debt that you will not be able to repay their loans. You should determine your debt-to-income ratio yourself to make sure that you will not be placing too much of a financial strain on yourself when you take on new monthly debt. You do not want to take on a new mortgage or car loan only to discover two months later that you do not make enough income each month to afford the payments. The guidelines Lenders typically rely on two debt-to-income ratios, depending on what type of loan you are seeking. Your front-end debt-to-income ratio looks at how much of your monthly income that your total housing payment — including principal, interest and taxes — consumes. In general, lenders want your monthly housing payment to take up no more than 28 percent of your gross monthly income, your income before taxes are taken out. Your back-end debt-to-income ratio looks at how much of your gross monthly income that all of your debts — everything from your mortgage payment and car loan to student loans and minimum monthly credit card payments — take up. Lenders want your total monthly obligations to equal no more than 36 percent of your gross monthly income. Your personal debt-to-income ratio Calculating how much you should be spending on monthly debt payments is pretty straightforward. First, determine your gross monthly income. If you make $36,000 a year, your monthly income is $3,000. Next, multiply that figure by 36 percent. This will give you $1,098. This means that you should be spending no more than $1,098 each month on debt payments. What if you are spending more than this? You’ll want to calculate your back-end debt-to-income ratio to determine how much you are paying on debt each month. First, calculate your total monthly payments. You can do this by digging up your recent credit card bills, mortgage loan statement, car loan statements, student-loan bills and any other loan payments you make each month. Don’t include household expenses such as the money you spend on groceries or utilities. Once you’ve determined this figure, divide it by your monthly gross income. This will give you debt-to-income ratio. For instance, if you are spending $1,000 on debt each month and your gross monthly income is $2,500, you have a back-end debt-to-income ratio of 40 percent, which is too high. You have two options when it comes to reducing your debt-to-income ratio. You can either boost your gross monthly income or reduce your monthly expenses. Whatever approach you take, know that lenders of all kinds will pay close attention to your debt load. Make sure, then, that you do the same.Credit cards provide you with financial freedom. However, if you do not use them correctly, these cards can also leave you with mounds of debt and a bad credit score. The problem? If you charge items on your credit card and then don’t pay them off when your next statement arrives, you’ll be charged interest. That interest can add up more quickly than you think. Interest Say you purchase an item — anything from a TV to an audio system to a home computer — that costs $1,000. Even if you have an attractive rate of 10 percent on your card, you might still pay more than $100 in interest charges depending upon how quickly you pay off your purchase. For example, if you pay only the minimum monthly balance on your credit card of $40, it will take you 29 months at an interest rate of 10 percent to pay back your $1,000 purchase. While paying this back, you’ll be charged $126 in interest. This means that your $1,000 purchase actually cost you $1,126. It gets worse with higher rate credit cards. Consider if you made the same purchase with a card with an interest rate of 25 percent and you made just the $40 minimum monthly payment. It would take you 36 months to pay back your purchase. Over that time, you’d be charged $427 in interest, making the total cost of your purchase $1,427. Minimum payment This is why it is always important to pay more than the minimum monthly payment. The University of Minnesota says that most credit card companies charge a minimum monthly payment of 4 percent to 6 percent of the card’s total debt. This means that, depending on the size of your debt if you make only the minimum payment each month, you might not pay off your credit card debt in your lifetime.Whether you are applying for a mortgage, car or personal loan, your lender will want to know one number: your three-digit credit score. This number has become perhaps the most important for anyone seeking a loan. There’s a reason for this: Your three-digit credit score tells lenders exactly what kind of a borrower you’ve been. Have you been a sloppy user, one who pays bills late or misses payments on a regular basis? Your credit score will show it. Have you been a responsible borrower, one who’s never paid a credit card bill late or missed a car loan payment? Your credit score will show that, too. Before applying for any loan, then, it is important to understand the basics of your credit score and what it means. Scoring Most lenders today rely on the FICO credit-scoring system. This three-digit score ranges from a low of 350 to a high of 850. If you want to borrow money, and you want to borrow it at the lowest possible rate, you’ll need a score closer to the higher end than the lower. What does your FICO score include? According to, your credit score is based on your payment history, or how often you miss payments or pay your bills late. The amount of debt you owe, the length of your credit history and the types of credit that you use will also impact your credit score. The most important of these factors is your payment history, which FICO says accounts for 35 percent of your credit score. Coming in a close second is the amount of debt you owe, which accounts for 30 percent of your score. The lesson here? If you want an excellent credit score, you need to pay your bills on time, never miss a payment and pay down as much of your credit card debt as possible. Of course, other factors will negatively impact your credit score. If you lose a home to foreclosure, you can expect your score to drop by 100 or more points. That foreclosure will remain on your credit report for seven years. If you declare bankruptcy, your score will again fall by 100 or more points. Depending on the type of bankruptcy that you file, this filing will remain on your credit report for seven to 10 years. What lenders want Though it varies by lender, most lenders reserve their lowest interest rates for those borrowers whose FICO credit score is 740 or higher. That is considered an excellent score by most lenders. If your credit score falls below 640, though, you might struggle to obtain a conventional mortgage loan. That is because lenders worry that borrowers with such low scores are more likely to miss payments and default on their loans. If you want to qualify for today’s lowest interest rates, you’ll need to bring an excellent credit score to the table. If you know you have a low score, it might make more sense to establish a history of paying your bills on time and cutting down on your credit card debt before you borrow again. You will benefit financially when you apply for that next mortgage, car or personal loan.When you are looking to borrow money, your credit report is the most important document that influences the lender’s decision. This credit report contains sensitive personal data about your payment history on many types of loans and lines of credit, plus legal information about bankruptcy, foreclosure, and tax liens. Because of the importance of your credit report, the Fair Credit Reporting Act (FCRA) was created to regulate the collection, dissemination, and use of consumer information, including consumer credit information History of the Fair Credit Reporting Act As consumer credit became more common in the 1960s, the United States government wanted to create clear legislation regulating how consumer credit information would be stored and shared. Congress passed the resulting Fair Credit Reporting Act on October 26, 1970. FCRA has gone through a series of amendments and clarifications from the late 1990s through present day. The current piece of legislation is comprehensive and offers a wide range of protections and rights for consumers. Important Components of the Fair Credit Reporting Act
  • View your credit report and score: All consumer reporting agencies, sometimes known as credit bureaus, must provide you with a copy of your credit report if you request it and verify your identity. You are eligible to get one free credit report each year from each of the three major credit bureaus. Use to view this report. You may need to pay for additional reports. Credit bureaus also must disclose your credit score if you ask, but they are allowed to require payment for this.

  • You have a right to know when a creditor uses information on your credit report against you. If a lender, credit card company, employer, or insurance company denies your application or takes other negative action against you because of your credit report, they must notify you. The FCRA also states that they must tell you where they obtained that credit report.

  • Limit access to your credit report: Only specific companies can gain access to your credit report. Employers must get your written consent before obtaining your credit report. Others must have a valid reason for viewing your credit, such as reviewing your application for a loan or rental.

  • Investigate information you believe is inaccurate: Credit bureaus have a responsibility to maintain accurate information in your credit file to the best of their ability. If you believe a piece of information is incorrect, you have the right to dispute it. The FCRA states that the credit bureau must investigate your dispute and verify from the source whether the information is correct.

  • Remove outdated information from your credit report: Negative credit history cannot stay with you forever. Credit bureaus must remove negative information after seven years or 10 years in the case of some types of bankruptcy. If you ever find older negative information on your credit report, the credit bureaus must remove it promptly when you point it out.

  • Limit whether your name appears on lists provided to insurers and creditors. Many companies request lists of individuals who meet specific credit requirements so they can offer credit cards, insurance, and other consumer financial products. If you request removal of your name from these lists, the credit bureaus must stop sharing your information. You can call 1-888-5-OPT OUT to opt out of receiving prescreened offers.
The Fair Credit Reporting Act is national legislation. Some states have also created legislation to provide further consumer credit rights. Contact your state Attorney General if you would like more information about state laws.

Like many credit card holders, there are times when you might have overdone it on the spending and are now facing the task of paying off your credit card balance. The length of time it will take is largely driven by the interest rate you’re paying on the outstanding balance, how much you continue to use the card and what you pay each month in terms of a monthly payment. A good rule of thumb is to try to pay off any card balance in 36 months, but you might want to see what it will take to pay off the balance in shorter or longer increments of time.