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Credit ratio is the relationship between your per month debt and your per month total income. This ratio is very useful for banks and other financial institutions. Bank or other financial institutions will give new loan only to those person or organisation who has lowest credit ratio. If it is 35% or more, you can not get more debt for your business or personal purposes. Because it will be risky for banks or financial institutions.

Example

We say this ratio as debt to income ratio (DTI). For example, your monthly total income from your business is \$ 44000 and your monthly debt which you have to pay is \$ 22000. So, your credit ratio is

= 22000/44000 X 100 = 50%

Benefits of Calculating Credit Ratio

• Check your Ability of Repay new debt.
• Compare Standard of Credit Ratio. If credit ratio is 35% or more. New debt will be banned.
• If your credit ratio is too high by your calculation. You can take better decisions for improving your incomes and paying your old debt fastly. So, calculation of credit ratio is also benefited to the debtor.

Related : Debt to Equity Ratio

Categories : Finance Dictionary  | Financial Ratios

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Accounting Education: Credit Ratio
Credit Ratio