What Is Debt Load? - CREDIT INFORMATION
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CREDIT INFORMATION: What is debt load?
Debt load is a term that is used to describe a consumer's amount of debt. It is often used to understand if you are carrying a "safe" amount of credit. Creditors look at a debt/income ratio, comparing your income with your outgo to analyze whether you have too much debt. The debt/income ratio is figured monthly and reveals either how good, or bad, your financial picture is on a day-to-day basis.
You can figure this ratio for yourself. Add all of your non-housing monthly payments except for your utilities and taxes. Then compare that total with your total gross annual wages divided by 12. If you don't have fixed monthly payments on revolving debts such as credit cards, you can estimate your monthly payments at 4% of the total amount you owe. When you divide your monthly debt payments by your total monthly income, you will get your monthly non-housing debt/income ratio. It is usually expressed as a percentage so move the decimal point two places to the right.
Example
Gross monthly income is $2,000
Monthly debt is $500 (credit card payments, gasoline bills, and car payments) $500/$2000 = 25% Your debt/income ratio is 25%
Rule of thumb
If your non-housing debt is 10% or less, you're in great financial fitness. If your non-housing debt is between 10% - 20%, then you'll probably be able to get credit, but as you approach 20%, you're getting too high!
There have been many attempts to devise formulas for setting limits on the amount of real estate debt one should carry. One rule of thumb is 2 (or 2 ½ to 3) times your annual income. If the annual household income is $70,000, a mortgage company might loan up to $210,000, provided the house is worth the money and the other credit factors are satisfactory. However, be careful. Just because a lender may be willing to extend credit doesn't mean that you should necessarily borrow that amount. You should also factor in your own specific fixed and variable expenses to determine your own ability to pay. How much you spend on real estate may depend on what area of the country you live in. Remember, if you're high on the real estate debt, you may want to be lower on the debt/income ratio to compensate.
By Practicalmoneyskills.com
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