Debt Ratio

How Does a Credit Card Debt Ratio Work?

A Debt Ratio (DR) is an evaluation of how much money is owed to various creditors, including unsecured creditors such as credit card companies and personal loans. A debt ratio that is over 20% means the company or lender has a high level of credit risk. It is critical to know your DR and its levels for the different financial obligations you have. It is helpful in knowing what you can afford to pay each month.

Debt ratios are reported on a monthly basis. The most common way to get your debt ratio is through the annual financial statements provided by your creditor or loan company. You may want to request your creditors for a statement for your current debt obligations and also for each previous year so you will be able to check your current DR and the past year’s DR. This can be done online. There are also free online tools that can help you analyze your DR.

For creditors that report your balance to the credit bureaus, the amount of credit they report as owed can help you see where you stand. However, the term “high” refers to how much is being reported as owing, not the actual amount of money owed. The U.S. Department of Education does not allow a balance that is higher than ten percent of one’s gross income. You may wish to take the time to get a copy of your credit report before filing your Annual Statement. In addition, keep a copy of your yearly statements as well as your Annual Statement just in case you need it.