You can determine your credit capacity by totaling your monthly loan payments, including credit cards, student loans, car loans, and any other monthly debt payments. Do not include rent or a mortgage. Then list your monthly income after taxes. Finally, divide the total owed by the total earned. For instance, you have $500 per month in loans and credit card payments, and your net income is $2,000. Divide your monthly payments ($500) by your income ($2,000). The result is 0.25. This means that 25 percent of your net income is spent on repaying consumer debt. The debt danger zone is often listed at 20 percent. If you are at or above this level, consider reducing your debt level by cutting spending and diverting funds to credit payments. At a 25 percent debt ratio, like the above example, no further debt should be added. We would like your feedback on this Personal Finance Frequently Asked Question.

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