If you do not make your credit card or loan payments on time, there will be serious implications for you. Defaulting on a loan or credit card is serious business, and can affect your ability to take out new loans in the future. It may even lead to legal action.


To prevent such problems, it is important to use credit wisely. That's why the first step in using credit wisely is knowing how much you can afford to borrow. You need to take a long, hard look at your current and future financial situation before you take on any new debt. Then, set a realistic budget for debt repayment by computing your debt ratio.

Debt ratio
Debt ratio shows you how much you owe compared with how much you earn. It usually gives a clear picture of your financial well-being. The lower your debt ratio, the more you have left over to save or spend on other things.

Your debt ratio is the percent of your monthly take-home pay that goes to paying debts and monthly obligations. It is calculated this way: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your take-home pay (your net pay after deduction of tax).

Example:     Monthly debt repayment P4,000     = Monthly take-home pay P10,000   Debt ratio 40%

Many experts recommend that no more than 15-20% of your monthly household take-home pay (excluding rent or mortgage) should be used to pay debts and make loan and credit card payments. Furthermore, no more than 40% of your monthly take-home pay should go to paying all debts, including mortgage payments.