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Understanding your debt-to-income ratio

If you are like many of your friends and relatives in the Houston area, you work hard every day to support yourself and your family. Unfortunately, though, with rising housing and other costs, making ends meet can be difficult. If you have a credit card, you may rely on it to help you make up the difference. 

The average Texan has between $7,000 and $8,000 of credit card debt. If you already struggle to pay your monthly bills, paying off such a high amount of debt may seem impossible. Whether you can do so without pursuing bankruptcy protection probably depends on your debt-to-income ratio. 

The math 

To determine your debt-to-income ratio, you have to do a bit of math. Fortunately, the calculation is not difficult. Simply take your monthly debt and divide it by your gross monthly income. To be sure you get a realistic picture, include your mortgage or rent, outstanding credit card balances, utility bills and other monthly obligations in your calculation. Your gross monthly income is your total pay before your employer takes out taxes. 

An analysis 

After you come up with your debt-to-income ratio, you need to know what percentage is manageable. Generally, financial experts say most consumers can have a debt-to-income ratio of between 20% and 30%. If yours is much higher than that, you may have a difficult time financing a home or buying a new car. You may also have trouble paying off your credit card balances. 

Some options 

Fortunately, you may not have to suffer the consequences of a high debt-to-income ratio. While filing for bankruptcy protection is not right for everyone, doing so may help you discharge some of your crippling debt. 

Excessive consumer debt can cause you to experience a variety of negative emotions. If you have problems paying off your monthly balances, you should try to determine your debt-to-income ratio. Then, if your calculation reveals you have more debt than you can afford, you can use the ratio to help you better plan for your financial future.

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