Debt safety ratio is the ratio of monthly consumer debt payments to the monthly take-home pay, expressed as a percentage. Lending institutions such as banks and credit card companies use debt safety ratio and other financial metrics to assess whether to approve a loan, mortgage or a credit card. According to John Martin of financial advisory firm Waddell & Reed, the debt safety ratio should be around 15 percent and not exceed 20 percent.
Step 1
Calculate your total monthly debt payments. Add the amounts from the latest statements for your personal lines of credit, student loans, credit cards and other installment debt obligations. Ignore insurance premiums, utility payments and mortgage payments.
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Step 2
Get your monthly take-home pay from your latest pay stub. This is your after-tax income plus deductions for voluntary contributions, such as 401(k) plan contributions and charitable contributions. If the pay is deposited bi-weekly, multiply by 26 to compute the annual take-home pay and divide by 12 to get the monthly take-home pay.
If you are self-employed and keep a record of your billings on a spreadsheet software package, such as Microsoft Excel, then your monthly income is the total billings over the past year divided by 12. This averages out high- and low-volume contract months.
Step 3
Calculate the debt safety ratio. Divide your monthly debt payments by your monthly take-home pay and express it as a percentage. For example, if your monthly debt payments are $100 and your monthly take-home pay is $1,000, your debt safety ratio is 10 percent.
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