Assess Financial Standing Through Debt-to-Income Ratio

Since November 2007, credit card debt has reached its highest ever. According to recent statistics from the Federal Reserve, an increasing number of consumers rely on credit cards for purchases since revolving debt increased by $8 billion, which in turn increased the overall credit card debt to $870 billion.

The trouble with credit card debt is that it can instantly become unmanageable. An increase in credit debt means a corresponding increase in monthly payments and the amount of debt accumulates even further.

If you observe that your credit card bills are increasing, start keeping tabs on your debts and finances. One tool that can help you is your debt-to-income ratio, which gives an accurate measure of your financial status and shows the relationship between your debt and your income.

To compute for your debt-to-income ratio, just divide your total monthly debt by your total monthly income and multiply it by 100. Next, the following ratios provide an assessment of your financial status.

If your ratio is lower than 36 percent, then you have a good financial standing and must maintain at this level by building your savings and making investments.

If your ratio is between 37 percent and 42 percent, then you have an acceptable financial standing but must still strive to cut down your debt. Try paying above the minimum amount required on your credit card bills so that it will decrease your debt more rapidly.

If your ratio is between 43 percent and 49 percent, then you are in the verge of financial trouble and must take corrective actions to immediately manage your finances. Consider balance transfers or debt consolidation loans to remove your outstanding debt.

If your ratio is 50 percent or above, then you have a financial problem so you must ask for assistance. Consider a financial planner or seek help from a credit counseling agency to discuss your options.

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Filed under: debt • Debt Consolidation • debt management • Loans

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