The formula for computing debt ratio is: total monthly debt payments ÷ gross monthly income. Yeah, it's a mouthful, but trust us, it's worth it! Just plug in the numbers, and you'll get a percentage that shows you where you stand.
For example, let's say you pay $1,500 per month on debts, and your gross monthly income is $5,000. Using the formula, your debt ratio would be 30% ($1,500 ÷ $5,000). That's not too bad, but we'll get to what's considered "good" or "bad" in a minute.
Now, here's a fun fact: did you know that lenders use debt ratio to decide whether to approve you for a loan or credit card? It's true! They want to make sure you can handle the payments, so they'll often look at your debt ratio to assess the risk.
