According to Investopedia, a debt to credit ratio (which is also called a debt to income ratio) is a calculation financial institutions use to assess lending risk. For this equation, a lender makes a list of all debt and compares the number against your monthly gross income (which is before taxes). However, many borrowers wonder how to figure out a debt to credit ratio by themselves. Fortunately, it's relatively easy to calculate.

Gather the Required Information

Before figuring out your debt to credit ratio, gather the required information for the calculation. Make a list of your monthly income (before taxes), mortgage payment (including taxes and insurance) or rental payment. Don't forget to include a home equity loan or line of credit payment, if you have a second mortgage on your home. Auto loan payments and credit card payments should also be gathered. Personal loan payments and student loan payment amounts will be needed. If you pay alimony or child support, jot this number down as well. Any monthly payment you make will be needed for this equation.

Use a Debt to Credit Ratio Calculator

Once you've compiled the necessary numbers, choose a calculator to complete the equation. MSN Money provides a free online calculator that allows you to complete the equation. Once you enter in the number, the calculator will provide you with three numbers, the debt payment amount, monthly gross income and debt ratio. It will also provide a "debt ratio ranking," which tells you how a financial institutions will perceive your ratio.

Assessing your Debt to Credit Ratio

After calculating a debt to credit ratio, consumers may wonder what a "good ratio" looks like. According to Investopedia, financial institutions prefer to see a ratio of 36 percent or less. Out of this percentage, no more the 28 percent should be your mortgage. Some lenders will permit a ratio as higher as 40 percent, however, consumers offered a loan with this ratio should make sure they can afford the extra costs.

Source:

MSN Money: How Much Debt it too Much

Investopedia: Too Much Debt for a Mortgage