Debt Ratio/Debt Burden
An amount of money you owe to banks or credit issuers. It is the percentage of your income that goes to paying your debts every month. Debt ratio usually gives a clear picture of your overall financial well-being. To calculate your debt ratio, first add up all your monthly income including take-home pay (after taxes), Social Security or disability benefits and alimony. Then add up all your monthly payments for interest bearing loans and accounts, such as mortgages, student loans, credit cards and car loans. If you rent your home, include that amount, but do not include utilities and telephone charges because they can vary on a monthly basis. Finally, divide your monthly payments by your income. Multiply the result by 100 and that number is your debt ratio percentage.
A low ratio is under 20%, which means that you are in good financial health and are doing a good job of managing your money.
A moderate ratio is between 21% and 40%. This means that you should look carefully at your monthly payments and start decreasing your overall level of debt, including credit cards.
A high debt burden is over 40%. You should immediately stop accumulating debt and start looking for ways to decrease your debt or increase your income.