What is a good debt to income ratio?

[james.hendrickson]

Hi Guys,

I was chatting about this with my girlfriend earlier this week - she's been applying for some credit cards and the question came up in the discussion: what is a good debt to income ratio?

I tend to not to look at specific ratios in my own personal finance per say - I stay consumer debt free and plow as much money into assets as is prudent.

[disneysteve]

The old rules of thumb (which aren't well-followed anymore) are that your mortgage shouldn't exceed 28% of income and total debt shouldn't exceed 36%.

There's also a rule of thumb that your car payment shouldn't exceed 10% of your monthly income for no more than 3 years.

[~bs]

if credit cards, 0

credit card interest rates are too high.

[disneysteve]

if credit cards, 0

Agreed. With the possible exception of a 0% card, you should never, ever use a credit card to make a purchase that you can't afford to pay in full when the bill comes.

[kork13]

It depends alot on the type of debt, as alluded to by Steve. For credit cards, or personal loans -- 0 is preferable. For a car, probably no more than 15%-20% of your annual income. A house, top out around 2-2.5x your annual income.

But those numbers are also in isolation... You don't want to top out in all of these things. Mere rules of thumb don't take into account individual situations. In general terms, of course, you want the smallest debt load possible.

[Fishindude77]

ZERO Debt -to- LOTS of Income is hard to beat.

[clatoden99]

The maximum number used when applying for a mortgage is 43% of monthly income before taxes going to pay for debt. The principal, interest and taxes on a primary residence shouldn't exceed 28% by the same standards. That said, having no debt is pretty nice, and I'd recommend it to anyone.

Remember that a high credit score doesn't make you smarter or more virtuous, it just makes you a better mark for lenders.

[TexasHusker]

This question can have innumerable answers, because every case is different.

Peoples' comfort levels with debt are different. There is no right answer, or one that would apply to your girlfriend.

Is there a reason she is applying for various credit cards? Needing to travel? Just stick with one, like American Express.

[Gailete]

If at all possible - no debt to income. Why is she applying for credit cardS? What is her credit score to start with? The longer a person can put off getting a credit card, the better as far as I'm concerned. If there is a legitimate reason for getting a card that is one thing, but if it is just to have a card stuffed in your wallet for 'just in case', I sure wouldn't want it.

[disneysteve]

What is her credit score to start with? The longer a person can put off getting a credit card, the better as far as I'm concerned.

Interesting that you ask about her credit score but then recommend not getting a credit card. Responsible use of credit is the way to build a good credit score.

We had our daughter get a credit card as soon as she turned 18. The sooner the better in my opinion. Building that solid credit history will serve her well in the future. She was able to qualify for a rewards card on her own. We didn't have to cosign. She's now 21 and they've raised her limit twice since she started. The card pays a $30 quarterly reward if she uses the card at least once a month and pays more than the minimum each bill. She makes one purchase a month, pays the bill in full, and earns $120/year in rewards. It's a pretty sweet deal.

[Gailete]

Steve, I was trying to ask why she was applying for cards (multiple) and what did she plan on doing with them. Applying for multiple cards at the same time can effect your credit score but not for the better since a person could possibly use all the credit immediately.

My one son has a credit or cards. I don't know which and has payed off a lot of cc bills over the years. The other son doesn't have a credit card, but he did have his school loans and a car payment so I assume he is managing to accumulate a credit score of some kind, including paying his bills on time if not early. He also has car insurance and other bills that get reported to a credit agency. He has no plans at all for buying a house and he doesn't have problems getting a car loan, so I don't think the lack of cards is a deficit to him.

Your daughter has a sweet deal for sure and you have taught her well. Many college age kids haven't been trained that well and would make a hash of their finances if they had a few of those cards in their wallets. I personally have never seen getting a credit card as a legitimate reason to 'help' your score. If someone is applying for multiple cards as the OP implied that makes me wonder why more than one at the same time and what is she planning on using them for?