How to Calculate Your Total Debt Ratio

how to calculate total debt ratio

Consumer debt was nearing $15 trillion for Americans at the end of last year. 

The worst part about that statistic? Not all of that debt is asset-related. In fact, the average American household carries $9,398 in credit card debt alone.

If you want to take control of your finances, the first step is to learn more about your current financial situation. Keep reading to find out how to calculate your total debt ratio and start getting out of debt.

The Actual Calculations

The actual debt ratio formula is fairly simple. 

Start by adding up all your monthly debt payments. This includes how much you pay monthly for your mortgage, car loans, student loans, and any other debt. Then, take this amount and divide it by your gross monthly income. 

For example, if your total monthly debt payments total $1,500 and your monthly gross income is $4,000, your debt to income ratio is 37.5%. 

You can create this ratio for both individual people or a combined household. This can help you figure out if you should apply for future loans individually or jointly. 

What's Good and What's Bad?

So now that you know your personal ratio, what's a good ratio and what's a bad ratio? The ideal ratio that lenders look for is anything between 28% and 36%. 

If you have a debt ratio lower than 28%, you can expect to easily receive a loan with favorable rates. This is because you're less of a risk to lenders since you should have more than enough money to make an additional loan payment each month. 

On the other hand, if your debt ratio is too high, lenders may deny you a loan. Even though a debt ratio below 100% means you have money left over in your budget, lenders understand you have other monthly costs, such as groceries. If you do get approved for a loan despite a high ratio, it will most likely come with a higher interest rate or require collateral. 

How to Improve Your Ratio

If you've done the calculations and aren't happy with your results, keep in mind that there are steps you can take to improve your ratio. There are two obvious ways to do this — increase your total annual income or decrease your debt amounts. 

Considering picking up a second job or asking your boss for a raise. Or, if you have a high amount of consumer debt, evaluate what payments you may be able to quickly eliminate. For example, if you have a high car payment, you could sell the car to pay off the loan and purchase a cheaper vehicle. 

You can also seek debt relief methods like debt consolidation to help lower your ratio. Read more articles on our blog to get more information on how this process could help your financial situation. 

Get Your Total Debt Ratio Under Control

Know that you know your personal total debt ratio, you have a better understanding of your financial situation. 

Having a high debt-to-income ratio can be discouraged, but don't let this knowledge get you down. Instead, use this information to assess and improve your situation. 

Not sure how it's possible to raise your family without using credit cards and debt? Browse the rest of this site for advice on loans and credit while being on a budget. 

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