Question

II. (a) What is the debt safety ratio? Under what circumstances is it used? Apply it to the following fact pattern. Betty Stevenson has a monthly take home pay of $3,200. Her monthly consumer credit payments total $500. What is her debt safety ratio? What if her monthly consumer credit payments totaled $800? Now what is her debt safety ratio? What debt is left out of the debt safety ratio? What is a financially healthy debt safety ratio? Analyze Ms. Stevenson's financial situation in both instances. Could she qualify to buy a car on credit? Show your work.

Answer 1

Solution:

=>Debt Safety ratio is the ratio of the monthly consumer bebt payments to the monthly take home pay which is expressed as a percentage.

=>It is genrally used by the financial institutions to check if one is eligible for the loan or credit cards etc.

=>Monthly take home pay of betty = $3200

MOnthly credit card payments = $500

Debt Safety Ratio = Monthly loan Payments / Monthly Income = 500 / 3200 = .1562 = 15.62%

=> Now the monthly credit card payments are $800

Debt safety ratio = 800 / 3200 = .25 or 25%

=> Debt Safety ratio does not include liabililties such as insurance premiums , utility payments as well as monthly mortgage payments .

=> A financially healthy debt safety ratio ranges from 15 to 20 %

In the first case i.e. when the credit card payments were 500$ , she is in the safety zone of 15 to 20%and she can buy a car on loan or can even get a credit card

In the second case the debt safety ratio is 25% and hence getting a loan or a credit card would be an issue.