How to Calculate a Debt Ratio

Debt ratio refers to the amount of money you owe compared to your income. Some types of loans, such as mortgage loans, take into account your debt ratio in the same way that they take into account your credit history and income. According to an analysis by Michigan State University, a debt ratio of 10 percent or less for consumer credit is safe, and higher debt ratios should be reduced. You can calculate a debt ratio figure using a standard formula.

Difficulty: Easy

Instructions

1. Determine the figure for your credit-related short-term debt payments. This figure is the sum of all the monthly payments you make make toward purchases you have made on credit, such as car, credit card, charge card and school loan payments.

2. Determine the figure for your monthly take-home pay. This figure is the amount of your pay after taxes and deduction.

3. Enter the figure for your short-term debt payments and the figure for your monthly take-home pay into the standard formula: Short term debt payments divided by monthly take-home pay equals debt ratio.

4. Apply the formula using the figures you have entered to calculate your debt ratio.

References

• Online debt ratio calculator from MSN
• Michigan State University consumer credit overview - PDF format