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2 calculations you should make every few months

On Behalf of | Sep 1, 2022 | Bankruptcy

If you seem to have less money nowadays than ever before, you may be a victim of high inflation. Indeed, according to the U.S. Congress Joint Economic Committee, average Americans are paying roughly $400 more per month for everyday items than they did in January 2021.

Your credit cards can provide some temporary relief, of course. Still, if you charge more than you can pay off every month, you eventually may struggle to make your monthly minimum payments. Regularly making two calculations might help you determine whether your consumer debt is getting out of control.

Your debt-to-income ratio

This calculation considers how much debt you have relative to your income. To determine your debt-to-income ratio, simply add together all of your monthly expenses, including your credit card balances, and divide by your gross monthly income. If your debt-to-income ratio is more than roughly 30%, you may have trouble securing financing for a car, new home or anything else.

Your credit utilization ratio

Your credit utilization ratio measures how much of your available credit you are currently using. To calculate this ratio, add up all of your credit card balances. Then, divide by the total credit you have available. Because your credit utilization ratio makes up a significant chunk of your credit score, you should try to keep it below 30%.

Even though your debt-to-income and credit utilization ratios may climb unacceptably from time to time, you should do what you can to keep these ratios manageable. Ultimately, if either of them shows no signs of improving, it may benefit you to explore all available debt-relief opportunities.