Credit card rewards can be pretty sweet. With cash back, airline miles, gift cards and free hotel stays, choosing plastic for your daily purchases can really pay off. But it can be hard to qualify for credit card incentive programs. In fact, the cards with the best rewards often are available only to people with nearly spotless credit reports and tip-top credit scores.
There are lots of reasons you could be denied a credit card, but one of the most common is having a debt-to-income ratio that’s too high. While you may shake off being rejected for a card and be tempted to move on, it’s important to know what having a high debt-to-income ratio means and how it affects your credit profile. Read on for details – and what you can do.
What Is A Debt-to-Income Ratio?
Simply put, your debt-to-income ratio measures how much you spend on debt payments per month, compared to your monthly income. Usually, that’s expressed as a percentage, and many lenders use that to help decide whether to lend you money.
Consider this scenario: Janet is lawyer making $60,000 a year, which amounts to $5,000 a month. Between her credit card, mortgage, and student loans, her monthly debt payment is $2,000. Her debt-to-income ratio is $2,000 / $5,000, or 40%.
Hopefully, your financial picture is different from Janet’s, because most financial experts recommend keeping your debt-to-income ratio below 30%. Anything higher will hurt your credit.
Why Does A High Debt-to-Income Ratio Interfere With Me Getting A New Credit?
Having a high debt-to-income ratio might not seem like such a big deal if you’re borrowing responsibly and paying your bills on time. But taking on too many debts relative to your income can have serious consequences.
For starters, a high debt-to-income ratio could signal that you’ve taken on too much debt overall. As what you owe increases, your credit score will drop, and that makes it harder to get other loans.
Besides credit scores, many lenders consider a customer’s debt-to-income ratio when deciding whether to approve new credit. That means that if you apply for a credit card and your debt-to-income ratio is higher than the bank will allow, you could be denied the card, even if your credit score is pretty good.
What Should I Do If My Debt-to-Income Ratio Is Too High?
If you were refused a credit card because your debt-to-income ratio is too high, it’s time to shift into debt repayment mode. Again, it’s not just this particular credit card that you should be worrying about – if your debt level has risen to the point that you’re being denied new credit, you could be headed for a financial crisis. To start with dealing with your debt, consider these tips:
- Stop charging; to make real progress with debt repayment, you’ll need to stop the bleeding.
- Transfer your balance to a lower-interest card. If you’re not paying interest through the nose every month, more cash will go toward the principle, so you’ll be debt-free faster.
- Cut, trim and slash. Take a hard look at your monthly budget and figure out where you can cut. Funnel your savings toward your debt.
The takeaway: Being denied a credit card because of a high debt-to-income ratio is serious. These steps can help you attack the problem.
» MORE: Credit cards for bad credit
Businessman image via Shutterstock