How Much Credit Can You Afford?

The first step to using credit wisely is figuring out how much credit you can afford to take on. Take a long, hard look at your current and future financial situation before taking on any new debt. You can do this by determining your debt-to-income ratio, which looks at how much you owe each month compared to how much you earn.

Debt-to-income ratio
Your debt-to-income ratio usually gives a clear picture of your financial well-being. To calculate it, add up your fixed monthly expenses, such as rent, mortgage or credit card payments (you do not have to include expenses like utilities or groceries). Then divide the total by your monthly take-home pay (net pay after tax deductions).

Monthly debt repayment $800  

=
Monthly take-home pay $2,000  
Debt ratio 40%  

As a general rule of thumb, your debt-to-income ratio should not be higher than 28%. Anything above this could mean being denied credit or paying a higher interest rate on your loan. Your ratio gives lenders a good indication of how much additional credit you will be able to handle.