Debt-to-Income Ratio

Do you know how much debt is too much debt for your finances? Your debt-to-income ratio allows you to compare the total payments you make each month on your debt to how much money you bring in. In turn, this simple ratio can help you determine if you’re on track with your finances or if you’re carrying too much debt and need to explore new ways to pay it off.

In addition, banks and other financial institutions use your debt-to-income ratio as a way to measure your ability to repay a debt. Maintaining a b debt-to-income ratio can help increase your borrowing potential, so you’re more likely to get approved for loans and new lines of credit assuming there isn’t any major issue with your credit score. If you’re carrying more debt than you can manage in your monthly finances or you simply need advice on strategies to pay off some of your debt, give us a call at .

What does my debt-to-income ratio mean?

Everyone’s financial situation is different, but in general, you can look at your debt-to-income ratio in the following way:

  • Your debt-to-income ratio is less than 36%. You are carrying a healthy amount of debt for your finances. Consider contributing to a Saving for the Future or retirement account with any extra money you have leftover in your monthly budget.
  • Your debt-to-income ratio is between 37% and 42%. Your debt load is acceptable, but not perfect. If possible, use some of your extra money each month to pay off a few debts and reserve the rest for savings.
  • Your debt-to-income ratio is between 43% and 49%. This ratio indicates you may be on the verge of financial distress. Explore ways to free up more money in your budget and consider using a debt reduction strategy to reduce your debts.
  • Your debt-to-income ratio is more than 50%. You have too much debt and need to find ways to reduce your debt immediately. Call us at to let a certified credit counselor assess your budget and provide options that can get you debt relief.

 

What if my ratio is high, but I don’t feel like I’m in financial distress?

In some cases—particularly when your ratio is between 43 percent and 49 percent—you may not really feel like you’re in financial distress even though you put such a high portion of your income towards paying your debts each month. Keep in mind that a healthy financial outlook includes setting aside money for savings, as well as regularly contributing to some kind of retirement account to prepare for the future. In addition, while breaking even every month may make it seem like you’re doing okay, one emergency or unforeseen expense could send your finances spiraling out of control.