How to Calculate Your Debt Ratio

Your debt-to-income ratio could affect your chances of receiving credit.

Your debt-to-income ratio is arguably as important as your credit score. Your credit score reflects how responsible you are in paying your bills, but the debt-to-income ratio gives potential creditors even more insight into your personal finances. The debt-to-income ratio shows just how much debt you're juggling as compared to your income. It's possible that someone with a good credit score could be turned down for a mortgage or home because lenders felt the borrower was simply carrying too much debt, despite a steady history of on-time payments.

Things You'll Need

• Recent pay stubs
• Recurring bill statements
• Calculator

Instructions

1. Gather recent paycheck stubs. Use the information to determine your monthly gross income.

2. Get statements from all your monthly recurring bills, such as student loans, car payments, credit cards, and your mortgage or apartment rental. Do not include variable living expenses such as groceries, gas or utilities, as these are not considered debts. Add the amounts from your recurring bills to calculate your monthly debt obligation.

3. Divide your monthly debt by your monthly gross income to determine your debt-to-income ratio. For example, let's say your gross monthly income is $4,000. Your apartment costs $900 a month, you have a $300 car payment and your loans and credit card debt totals $175 a month. That's a total of $1,375 in monthly recurring debt. Dividing $1,375 by $4,000 gives you a debt-to-income ratio of 34.4 percent. According to the website Bank Rate, creditors like to see debt-to-income ratios of less than 36 percent. Loans might be possible with a higher debt-to-income ratio, but at higher interest rates.

References

• Bankrate.com: Debt-To-Income