Credit myth: Debt to income ratio affects credit score

Debt to Income ratio

Faith, Fraud & Minimum Wage (Photo credit: Wikipedia)

Debt to Income Ratio does not Affect your Credit Score

One of the things that fascinates me about the credit scoring system is how much of it flies in the face of common sense.  Shouldn’t how much debt you have as compared to your income be the most important factor in your dependability to repay your debts?  If someone were borrowing money from me that would be the first thing I would want to know.  If they just got a big raise I might be more willing to lend.  It just doesn’t work that way in the credit scoring system.

FICO doesn’t know or care about that nice raise or bonus you just got.  If you get a raise the best way to improve your credit score fast for most people is to pay down their credit card debt as fast as they can.  This has an immediate effect on your credit score effective on the reporting date of your next statement.  Reporting dates are normally right after the statement closes for the month.  This will be 2-7 days after the due date.  Watch out for charges to your card during this 2-7 day period if you want the lowest balance possible reported each month.

Why does Debt to Income Ratio not Matter to FICO?

FICO’s computers run on formulas referred to as algorithms.  These algorithms are designed based on research into the predictability of repayment based on hundreds of factors.  All of these factors involve past behavior.  Many people with high incomes are not proven to be trustworthy to repay debt.  A high flying wealthy person may lead a lifestyle that keeps outgrowing his money no matter how much he makes.  The minimum wage worker may be meticulous about living within his means and paying on time no matter what the hardship.  Many minimum wage worker’s have higher credit scores than people who make enviable salaries.  FICO scoring may be counter intuitive at times but to FICO’s credit they do treat everyone the same.  Let’s give them their due on that point.  It’s just that their logic leaves me scratching my head at times.

For a Mortgage Application Debt to Income Ratio Matters a Lot

As important as the applicant’s credit score is to a banker or mortgage lender  they are also interested in a person’s ability to repay.  Good intentions are not tangible like debt to income ratio.  Lenders look beyond the past as reflected in the credit score to see what the present ability to repay is.  The foreseeable future is what counts.  To lenders your expenses and salary are just as important as your credit score.  Debt to income ratio is not important to your FICO score but the lender will factor it in.

fico doesn’t know or care about that nice raise or bonus.



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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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