For many Americans, money seems to be in short supply nowadays. Because most cannot afford to pay for even a $1,000 emergency, turning to credit cards is often the only option. If you have too much debt, though, you may worsen your financial situation considerably.
How much debt is too much varies from person to person. Still, calculating your debt-to-income ratio is a good way to know whether you have accumulated a potentially problematic amount of consumer debt.
What is your debt-to-income ratio?
Your debt-to-income ratio compares how much revolving debt you have relative to your gross monthly income. You should probably know both your overall debt-to-income ratio and your per card ratio.
How do you calculate your debt-to-income ratios?
To calculate your overall debt-to-income ratio, add together all your normal monthly expenses. These include your credit card payments, mortgage or rent, car loans, student loans and everything else you must pay on a monthly basis. Then, divide the sum by your gross monthly income, which is the amount of money you make before deductions.
To determine your per card debt-to-income ratio, simply divide your current balance for each credit card you own by your gross monthly income.
Why is a high debt-to-income ratio bad?
Having a high debt-to-income ratio may cause your credit score to plummet. Likewise, if your debt-to-income ratio is more than 43%, you may not be able to find financing for a home purchase. Reducing your debt-to-income ratios may solve these problems.
Ultimately, while there are other ways to lower your debt-to-income ratios, exploring bankruptcy protection may be in your financial interests.