Understanding Debt Credit Ratio
How to calculate the credit debt ratio
Debt to income ratio requires that you calculate your debt to your income. First, get an overall picture of your monthly rent or mortgage payment, car payments, monthly revolving credit payments, monthly student loan payments, monthly minimum credit card payments times two, other loan payments, and then total them up.
Then when you total your net take-home pay, annual bonuses and overtime, along with other annual income, divided by 12 you have what you can pay toward your debt.
Lastly, divide your total monthly debt by your total monthly income to get your debt ratio. If your debt ratio is 36% lower than your income then you are good, if not, your ratio is too high.
What is a good credit debt ratio?
Financial barometers indicate that if your debt to income ratio is:
. Less than 30%: Excellent.
. 30% to 36%: Good. You won’t have problems with lenders, but work it down below 30%.
. 36% to 40%: Borderline you may struggle to make payments.
. 40% or higher: Red flag; your credit requires attention.
How to improve your credit debt ratio
A credit debt ratio changes according to the amount owed. Pay as much as you can each month and your current level of unsecured debt will be reduced which will lower your credit debt ratio. This is important because large credit card purchases or credit card cash advances will be difficult until you gain control over your current debt situation. Ultimately, you should eliminate debt all together. Debt calculators can inform and provide decisions to help you find solution that’s right for you. Credit counseling may also make sense for a responsible constructive way in becoming debt free.
For more information
Debtsteps.com - Your Credit to Debt Ratio
About.com - Do You Have Too Much Debt? Calculating Your Debt to Income Ratio