What is a debt-to-income ratio?
Your debt-to-income ratio compares the amount of your debt to your income. The ratio is best figured on a monthly basis. For example, if your gross pay is $2,000 and you pay $600 per month in debt payments, your debt-to-income ratio is 30% ($600 divided by $2,000 = .30). You can also use our convenient calculator. Why should you monitor your debt-to-income ratio? Keeping track of your debt-to-income ratio can help you avoid “creeping indebtedness,” or the gradual rising of debt. Impulse buying and routine use of credit cards for small, daily purchases can easily result in unmanageable debt. By staying aware of your debt-to-income ratio, you can: Make sound decisions about buying on credit and taking out loans. See the clear benefits of making more-than-the-minimum credit card payments. Avoid major credit problems. You can create a personal budget for your household using this handy spreadsheet. Creditors may use your debt-to-income ratio to determine whether you’re creditworthy. If you
• How do I calculate my debt-to-income ratio? • What is an acceptable debt-to-income ratio? • Why is monitoring my debt-to-income ratio important? What is a debt-to-income ratio? A widely used measure of financial stability, your debt-to-income ratio is calculated by dividing monthly minimum debt payments (excluding mortgage or rent payments) by monthly gross income. For example, someone with a gross monthly income of $2,000 who is making minimum payments of $400 on loans and credit cards has a debt-to-income ratio of 20 percent ($400 / $2000 = .20). Other authorities may offer slightly different definitions of debt-to-income ratio. While variations will result in different percentage outcomes, the overall concept is the same: a debt-to-income ratio compares debt load to income. How do I calculate my debt-to-income ratio? The first step in calculating your debt-to-income ratio is figuring your monthly gross income, which is your income before taxes or other deductions. (This is usually
