Although most people have debt, some may not know how much debt is considered “too much debt” and when a debt solution is needed.

One way to get a general overview of your financial health is to calculate your debt to income ratio—your monthly debt payments compared to your monthly income.

Knowing Your Debt to Income Ratio

Your debt to income ratio can give you a good idea of where you stand and can help you decide if you need to reduce your debt.

When mortgage lenders calculate an applicant's debt to income ratio, mortgage and rent payments, property taxes and insurance are included in the calculations.

Other lenders may not consider housing costs as part of a borrower’s debt when calculating the income to debt ratio.

Other debts that are generally included in debt to income ratio calculations are:

• Personal loans and home equity lines of credit
• Car payments
• Monthly payments on revolving credit accounts
• Student loan payments
• Double the minimum monthly credit card payments
• Child support payments

To determine the income figure to use in a debt to income ratio, consider:

• Monthly take-home pay
• Amount received yearly in overtime and bonuses, divided by 12
• Any other annual income, divided by 12

The total of all monthly debt payments divided by total monthly income is the percentage of debt to income.

You can use this number to determine if you should seek a debt solution.

How Low Can You Go?

Obviously, the lower your debt to income ratio, the better.

Lenders generally consider a 36 percent or lower debt to income ratio good.

If your debt to income ratio is above 36 percent, you may be stretched financially and need to reduce your debt.

Lenders generally consider borrowers with an income to debt ratio, including housing expenses, below 30 percent to be a low risk.

Finding a Debt Solution

If your debt to income ratio is 40 percent or higher, it may be a good idea to seek a debt solution.

You may consider utilizing credit counseling through an accredited agency, a debt settlement program or filing bankruptcy.

Chapter 7 bankruptcy can be a very attractive option for people who have a large amount of unsecured debt. With Chapter 7, many people can get a fresh start after debts are discharged and begin to rebuild finances without the heavy burden of unmanageable debt.

Debt Calculator

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