Significance

• The debt to income ratio is used by lenders to determine a borrower's management of debt and his ability to repay additional debt. Most lenders like to see a debt to income ratio of less than 40 percent after a new debt is added to the ratio.
  
  

Function

• A line of credit allows a borrower to borrower funds as needed, and pay down the debt on a revolving basis. The existence of a line of credit itself does not affect the debt to income ratio, however, the minimum monthly payment is added to the debt side of the ratio.
  
  

Considerations

• If the line of credit is not used by the borrower, it will not have a monthly payment and will not affect the borrower's debt to income ratio. However, if the line of credit is extended to its limit, the payment will have a great impact on raising the borrower's debt to income ratio.
  
  

Misconceptions

• Lenders do not look at just a borrower's debt to income when considering his ability to repay, especially if there is a line of credit in his name. The lender will look to see if there is a large risk of the borrower extending his line of credit to its limit and then becoming unable to pay.
  
  

Prevention/Solution

• To keep the line of credit at a minimal effect on the borrower's credit score and debt to income ratio, he should keep his balance at less than 30 percent of the limit.