$70K Student loan debt & debt-to-income?
August 1st, 2010 | 
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Okay, so my husband and I graduated college in 2007 and started paying off our loans (70K total) about a year ago. Our monthly payments (combined) are about $450 a month. We make every (EVERY) payment on time, and always pay a little more than the minimum. The problem is that our combined income is about $72K a year, or $6000 per month. (We both make equal money and have equal loan payments every month on our separate accounts.)
We have absolutely no problem making the payments, and (monthly) this comes out to a relatively small chunk of our income.
But when I have my credit report analyzed through Experian (online), it says my debt-to-income ratio is at almost 100%, 99% of which is the student loan account. Apparently this is calculatedby comparing my total loan debt ($35K) with my income $36K). It also stresses that this negatively impacts my credit score.
But if I’m only paying about $225 a month on student loans, out of $3000 a month in income, and I pay the loan on time, every time, why does this lower my score?!?!?
This is a 20-year loan, and we want to buy a house in 2 years. I’m afraid this will affect our interest rates when we apply for a mortgage, but for the life of me I can’t understand why this would be the case.
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School Loans Consolidation
Income has NO effect on your credit score. It can affect how the bank looks at your loan application, but has nothing to do with how the credit bureaus calculate your credit score.
The more important measure is how much of your monthly income is used to pay debt (car loans, student loans, cc, mortgages). Getting that under 25-30% is pretty important if you want a good rate on a mortgage.
Focus on paying off any credit cards first, then any car loans after that. Student loan debt is considered “good” debt as it cannot de discharged in bankruptcy.
Good luck and I hope you get the house you want!
Credit Card Debt Consolidation
I understand what the report says although I don’t agree with it.
The best thing you and your partner can do is to both take out a credit card or two and withdraw as much cash from an ATM per month as the card will let you.
Don’t spend the cash, just use it to pay off the full balance each month and you will see a substantial change in your credit rating, especially if you do this for the next 2 years.
Depending on which banks issue the credit cards you take out you may be charged a small fee each time for withdrawing your available credit as cash but there is no better way of improving your credit score.
Consolidate Debt Credit
Because as long as that debt is out there you have the potential of defaulting on it and the entire loan being called immediately.