What is Your Debt-to-Income Ratio?

What is Your Debt-to-Income Ratio?
Eileen St. Pierre, The Everyday Financial Planner

family vacationAh, those lazy summer days. There are vacations to plan, theme parks to visit, summer sales to check out at the mall. All these activities cost money. It’s real easy to get in over your head. This spending can have a snowball effect, leading to a debt spiral that is hard to stop. The first step is to recognize if you have a debt problem.

Here are some warning signs:

  • You are stressing over money.
  • You have depleted or neglected your savings.
  • You are thinking about tapping accounts like your 401(k) that you have always considered off-limits.
  • You are starting to pay bills late each month.
  • You are making debt payments with your rent money.
  • Creditors are starting to call and send you threatening notices.
  • You are transferring balances from one credit card to another.
  • Every year you have to use your tax refund to pay your bills.

Calculate your debt-to-income (DTI) ratio:

  • Calculate the amount of debt you owe each month, including your mortgage or rent, car payment, and minimum credit card payments.
  • Divide this amount by your monthly income.

Here are some calculators that do the math for you:

If your DTI is 20% or less, you are doing an excellent job managing your debt! According to Gerri Detweiler, Director of Consumer Education at Credit.com, a DTI ≤ 36% is a healthy debt load to carry for most people. If your DTI is

  • 37% – 42%, that’s not bad but you should start focusing on reducing debt now before you get in real trouble.
  • 43%-49%, you need to take immediate action to avoid serious financial difficulties.
  • 50% or more, you have a debt problem. You need to seek professional help to aggressively reduce debt.

If you need professional help, check out these organizations:

Please read my column Choosing a Credit Counselor to make sure you do not choose an organization that will take advantage of you in your moment of need.

Visit my Debt Management page for more information.