Having a certain amount of debt is expected and it can actually build credit by showing you’re ability to pay it off. But how much debt is too much?
A debt-to-income ratio, or simply, a debt ratio is used to determine if a person has too much debt. Here’s how to determine your debt ratio:
- Add up your monthly debt (credit cards, auto loans, student loans, any other loans but not your mortgage payment).
- Divide this number by your monthly income, after taxes and deductions.
- Repeat this calculation but this time include your mortgage payment.
What the numbers mean:
- If your debt, not including your mortgage payment (or other housing), is 10% or less you’re doing great. If it’s between 10% and 20% you’ll probably be able to get credit. However the closer to 20% you climb, the less likely you’ll be able to manage your debt load.
- If your debt, including your mortgage payment, is above 36% then you’re at risk to not able to handle your debt.
- If you’re feeling stressed about bills and aren’t sure if you’re going to be able to pay your debt then it may be time to put a plan in place to better manage your finances.
At GSCU, we offer a Credit Report 101 session to help take the mystery out of your credit report. This free one-on-one review includes suggestions on how to improve your credit score. We also offer debt consolidation loans to help you pay off debt at lower rates than high-rate credit cards, all in one monthly payment.