Cap your debt

This article is the archived version of a report that appeared in July 2009 Consumer Reports magazine.

At the height of the housing bubble, people were approved for mortgages with debt-to-income ratios as high as 55 percent. Now you might be able to get a mortgage with a 43 percent ratio, but keeping it at 40 percent or less is safer. So if you and your spouse make $100,000 a year before taxes, your payments for your mortgage, other loans, and credit cards should not exceed $40,000 a year.

To reduce your debt-to-income ratio, pay more than the minimum payments on your monthly loan bills that appear on your credit report, such as auto, student, or personal loans and credit cards.

Students should base their educational debt loads on their anticipated incomes. Mark Kantrowitz, publisher of student aid Web site FinAid.org, advises keeping your student loan payment to no more than 10 to 15 percent of your starting salary; even 13 percent or above puts you at risk of default. So check the average starting salary for your field and don't borrow more than you'll be able to pay. And don't put your tuition on a credit card—something almost one-third of students did in 2008.

File the FAFSA financial analysis form to be eligible for federal loans, which have lower interest rates and flexible repayment terms. Always max out federal loans before applying for pricier private ones.