Saturday, February 9, 2008

Debt to Income Ratio - A Calculation Important in Debt Reduction

Ever wonder how much debt is considered by banks and financial institutions to be too much debt? If you don't know where you stand, its time to take a moment and figure out your debt to income ratio.

First, take a moment to figure out your bad debts. This includes credit card balances, store charge cards, car loans, and any debt that is depreciating in value. Don't worry about including good debt like student loans, mortgages, investements, etc. Now you need to figure out your after-tax annual income. Finally, divide your after tax income by the total bad debt (after tax income / total bad debt = debt to income ratio.)

Obviously, the personal finance and frugal communities don't believe in carrying any bad debt, but if you do carry debt you shouldn't carry more than 15%. If you meet a company who is trying to convince you otherwise, RUN! They obviously are only concerned about their bottom line.

1 comment:

Dawn said...

This is such an important number for people to know...
I wonder how many people in America actually know their DTI ratio?
It would be interesting to know. I agree, there are way too many companies willing to extend credit to people way beyond their appropriate DTI.
It's just not right...