How to Measure Debt

Having too much debt can mean not getting approved for a mortgage or paying higher interest rates on credit cards, car notes and other investments. Bottom line: debt can cost you in the long run. That's why it's important to know how much debt you have. There are a few ways to measure your debt. Note that the amount you owe must be measured against your income--the more you make, the more debt you can afford to take on.

Instructions

1

Educate yourself on ratios--a term defined as one value divided by another. The end result is a representation of one quantity in terms of another quantity. To measure your debt, you will have to define debt in terms of both your available credit and income.

2

Calculate your debt to income ratio. You can calculate your debt to income ratio by listing your monthly mortgage or rent, your minimum monthly credit card payments, monthly car loan payments and any other loan obligations. Add all those things together and divide it by your annual gross salary plus bonuses, overtime and any other income you receive. This number will equal your debt to income ratio.

According to US News and World Report, a debt to income ratio measurement of 36 percent or less is pretty healthy for many people. However a debt load over 43 percent shows that financial problems are probably on the way.

3

Calculate your debt to credit ratio. Go to AnnualCreditReport.com

to get a free copy of your credit report.--you are entitled to one every 12 months from each of the three major agencies. In the report you will be able to see how much available credit you have. Take your amount of debt and divide it by your available credit. If you have a high debt to credit ratio, lenders will assume you are a higher credit risk.