The ratio we are examining here is the percentage of your total monthly debt repayments that you are obligated to pay back against your debts, in relation to your gross pre-tax monthly income (total debt repayments per month/gross monthly income). This is called your debt-to-income ratio.

This is a very important ratio when applying for credit. Some financial institutions allow 40%, some may allow upwards to 50% if you have a stable job, investments, and a high net worth.

When considering your total gross income, add up your own, plus a spouse’s (or common law spouse’s) income, if they are co-signing the loan. You can also add any monies that you receive from investment income.

Here is where you can get a true snapshot of your debt-repayment situation and get a glimpse of financial reality. You can find out if you are already in too deep to add on any more debt right now (especially if your job is not stable). List and add all your monthly repayment obligations on your debt; for example the minimum credit card payments per month, car loan payment etc, and include your rent or mortgage payment. For more clarity, don’t just use minimum payments on your credit cards, but payments that would repay your cards totally over one year.

Now divide your total household’s monthly repayments, by your gross monthly pay(s). Hit the % sign on your calculator when dividing to give you the percentage ratio. Some people, who are in financial duress, may find they are actually running near or over 100%--much higher than the allowable figure. View the creditors ratio, as a financial tool to adapt yourself in defense of your own credit standing, so that you will not borrow over your own ability to repay. View a turned-down loan as a goodwill warning. If you go over your safe ratio each time and get a co-signer to acquire too much credit, you may place your ratio at a dangerous level. Regard your debt-to-income ratio as your own personal monitoring system before you approach any creditor to borrow. In this way, you’ll maintain enough cash flow to invest for retirement and meet emergencies that may pop up without warning. A safe ratio allows for a sense of fiscal peace, and enables you to enjoy the freedom of having cash to spend, versus placing your entire income in bondage to your debt.

Co-signing dulls your financial perspective.

Again co-signing can be a form of disregarding the true ratios warning. Sure, you may get the loan, but your creditor knows they would take a huge risk of repayment if your ratio were too high, if someone else weren’t on the hook with you. Only allow co-signing if you are a young adult building new credit, and you can definitely repay within a sane 40% ratio of monthly debt repayments, in relation to your securely employed gross pre-tax income.

Make sure you add your rent or mortgage payment in. Rent or board payments, are really a replacement of what would normally be considered prepayment on a mortgage debt to be considered in this ratio.