By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.
An ideal debt-to-income ratio should be 15% or less. Ratios between 15% and 20% may lead to problems making payments while paying other bills on time. Once debt-to-income ratios exceed 20%, problems with repayment increase dramatically. At this point, seeking help from a trained consumer credit counselor may be needed.
The ratio measures the money a company loses on its overall sales due to customer(s) not paying their dues. The average bad debt to sales value in 2022 was 0.16%. The companies with the best ratio (best performers) reported a value of 0.02% or lower.
Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
The 20/10 rule is a financial strategy to help you avoid dangerous levels of debt. Simply put, the 20/10 rule advises that you should avoid accumulating long-term debt that exceeds 20% of your annual income, and you should avoid debt payments of more than 10% of your monthly income.
Industry-wise analysis of Bad Debt Ratios
The overall bad debt-to-sales ratio ranged from 0% to 1.38%. On average, this ratio increased by 0.02 percentage points in 2023 from the 2022 levels. Meanwhile, the bad debt-to-accounts receivable ratio rose by 0.15 percentage points to 2.28% in 2023, up from 2.13% in 2022.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
According to Experian, average total consumer household debt in 2023 is $104,215. That's up 11% from 2020, when average total consumer debt was $92,727.
Debt-to-Equity Ratio
A higher ratio indicates a greater reliance on debt and higher potential financial risk. A healthy debt-to-equity ratio varies across industries, but as a general rule of thumb, a ratio above 2:1 is considered excessive debt.
It compares annual payments that service all consumer debts—excluding mortgage payments—divided by your net income. This should be 20% or less of net income. A ratio of 15% or lower is healthy, while higher than 20% is considered a warning sign.
Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.
FHA loans for higher DTI
FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.
For instance, investors or other businesses interested in acquiring or merging with your company will want to see a debt ratio between 30 percent and 60 percent. If your debt ratio is higher than 60 percent, banks and other lenders may consider your company a risky borrower.
For lenders and investors, a high ratio (typically above 2) typically means a riskier investment because the business might not be able to make enough money to repay its debts.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
Therefore, the only way to improve your debt ratio is to either reduce your housing expenses, increase your income, reduce your debts, or a combination of these 3 factors. It may be difficult to reduce the cost of rent or mortgage and/or increase your income in the short term.
Return on assets (ROA) is a key gauge of a company's profitability. The ROA ratio measures a company's net income relative to its total assets. A good ROA depends on the company and industry, but 5% or higher is generally considered good.
Good debt is debt that you take on to achieve meaningful growth in your personal life or finances, like a mortgage or student loan. Bad debt is relatively expensive debt and debt that someone takes on for unnecessary expenses, like credit card debt.
If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you're allowed to deduct is the amount you paid to acquire it. CAUTION! You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income.
Lenders prefer bad debt to sales ratios under 0.4 or 40%. However, most companies prefer to have much lower numbers than this. Unless you have no bad debt, there is room to improve.
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa.
Your consumer debt—credit card balances, automobile loans and leases, and debt related to other lifestyle purchases—should amount to less than 10 percent of your monthly gross income. If your consumer debt ratio is 20 percent or more, avoid taking on additional debt.
Taking frequent breaks from the screen can help to avoid tired eyes and headaches. The 20, 20, 20 rule suggests taking a break of at least 20 seconds, every 20 minutes and to look at least 20 feet away.