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:

  1. Add up your monthly debt (credit cards, auto loans, student loans, any other loans but not your mortgage payment).
  2. Divide this number by your monthly income, after taxes and deductions.
  3. 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.