How much credit can you afford?

How much credit can you afford?

A rule of thumb to determine how much credit you can take on is to compare how much you owe with how much you earn. This is called your debt-to-income* ratio The amount you owe, or debt, can include monthly payments of loans such as auto and home loans, and credit cards. Here is a sample calculation.

Monthly debt repayment = 8,000

Monthly net take-home pay = 32,000

Debt-to-income ratio = 8,000 / 32,000 = 25%

Your debt-to-income ratio is presented as a percentage. Thus, with the example on the left, you have a debt-to-income ratio of 25%.

Generally, a debt-to-income ratio of more than 40% is a signal that you may have too much debt and could be header for some financial trouble. A high debt-to-income ratio could mean that you can be denied further credit or you will have to pay a higher interest rate if you take on more credit.

*Income refers to your net take-home pay (or your earnings minus takes and other deductions)

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