Debt is money that is owed to others. Another word that is used to refer to debt is “liability,” and debt reduces your personal net worth, or your assets minus your liabilities. Debt may be in the form of money owed on a credit card, student loans, a car payment, or a mortgage. Your current debt can impact your credit score, interest rates that you are offered, and can make it more difficult to obtain a mortgage or car loan.
You’ll want to watch your debt-to-income ratio, a percentage that is calculated by adding up your monthly debt payments, dividing by your gross monthly income, and multiplying by 100.
If your monthly debt payments total $2,000 and your gross monthly income is $6,000, your debt-to-income ratio calculation is:
2000 / 6000 = .333 x 100 = 33%
Your debt-to-income ratio is a comparison of your total debt to your monthly income, and is an indicator lenders use when considering you for further loans, such as a mortgage. The lower your debt-to-income ratio, the healthier your finances are. Most mortgage lenders are looking for a borrower’s debt-to-income ratio to be under 43% in order to qualify for a mortgage. Of course, borrowers with lower debt-to-income ratios will be offered more favorable mortgage terms.
If you find that you need help managing your debt, you may wish to consult with a credit counseling service. You will be asked to provide information about your finances and spending and will work with a professional to create a plan. Know that help is available.