Effects

• If your total monthly debt payments are $2,500 and your total monthly gross income is $4,500 your debt ratio is 55 percent.
  
  

Significance

• If you are buying a home or refinancing your mortgage many lenders will not let you continue with the process if your debt ratio is 40 percent or higher. This figure can fluctuate between 36 percent and 42 percent.
  
  

Prevention/Solution

• When you pay down your debts you can decrease your debt ratio. Paying down the balances on your credit cards will reduce the monthly payments and paying off credit card balances will eliminate the payments altogether. Both processes contribute to a lower debt ratio.
  
  

Considerations

• To reduce your debt ratio you can increase your income. Based on the fraction used to compute your debt ratio more income lowers your debt ratio and this can be the difference between being approved or denied for a loan.
  
  

Warning

• If you are applying for a loan, you should stop making purchases with your credit cards.