An indicator of financial difficulty is when total monthly consumer credit payments (excluding a mortgage) exceed 20% of take-home (net) pay. This is called a “consumer debt ratio.” The table below indicates “danger points” (i.e., 20% of net income figure) for various take-home pay amounts.
Monthly Net Income/ Danger Zone
$ 2,000/ $ 400
$ 3,000/ $ 600
$ 4,000/ $ 800
$ 5,000/ $ 1,000
$ 6,000/ $ 1,200
$ 7,000/ $ 1,400
$ 8,000/ $ 1,600
$ 9,000/ $ 1,800
$10,000/ $ 2,000
A related indicator of debt is a client’s “annual debt ratio.” This ratio is calculated by adding annual consumer debt payments and housing expenses (i.e., rent or mortgage payment), and dividing the total by annual take-home pay. If an annual debt ratio exceeds 50% (i.e., credit obligations plus housing expenses exceed half of net income), this is another “red flag” that someone is experiencing financial distress.
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