Debt is a two-edged sword. While creditors may deny your credit applications due to insufficient credit history -- that is, too little debt -- they may also deny you because you have too much debt. They use specific equations to determine whether your current level of debt may make it difficult for you to make monthly payments.
Average Household Debt
Household debt includes debts such as personal credit cards, mortgage loans, auto loans and student loans of everyone in your household. It doesn't include expenses such as apartment rent or utilities, though overspending on these things can lead to debt. As of 2011, the average American household has about $10,700 in credit debt alone according to CNN Money. Other debt, such as mortgage and student loans, makes the average total household debt higher.
Debt-to-Income Ratio
Your debt-to-income ratio is more important to creditors than the dollar amount you owe to creditors. Your DTI is the amount you owe to creditors relative to your income, which gives some insight into what percentage of your income you have to spare each month after your obligations. Creditors prefer a DTI no greater than $9-to-$25 (36 percent) before you get a mortgage. The DTI of the average American household is 125 percent, according to Yahoo! Finance, which includes all Americans with mortgages.
Balance-to-Limit Ratio
Also important to creditors is the amount you owe creditors relative to the limits on your credit accounts. Your balance-to-limit ratio indicates how well you make payments on revolving accounts, and by extension, how you handle money in general. For example, a maxed-out credit card may indicate a habit of overspending. Calculate your balance-to-credit limit by dividing the total balances on your credit accounts by the total limits of those accounts. Your ratio should be no higher than 1-to-2 or 50 percent, according to DebtSteps.
Reducing and Eliminating Debt
Despite what ratios creditors set, if your debt causes you financial difficulty, it's too much for you personally. Use the debt snowball plan to eliminate your household debts one at a time. First, keep a written record of your expenses for one month. At the end of the month, review the record and determine which to reduce for the following month. Use the money you save throughout the month to make more than the minimum payment on one of your debts, whether it's the one with the highest interest rate or the one with the smallest amount. Do this every month until you eliminate the debt. Use the money you save by not making payments on that debt to repeat the process with the next debt on your list, then the next, until you are debt-free.
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