The Issue of Debt

• Debt is a national problem. MSN reports that the average U.S. household has at least $8,000 in credit card debt, 43 percent of American families spend more than they earn, and personal bankruptcies increased 200 percent from 1994 to 2004. Debt affects everyone, so it is important to understand the terminology associated with it.
  
  

Debt Servicing

• Debt service is the money required to repay the principle and total interest of a debt within a designated period of time. Servicing a debt must take into account all fees and costs associated with the credit card, loan or type of debt that is being serviced. For example, many loans have early pay-off fees. If the loan is paid off before the designated date, the fee must be included in the total value of the loan.
  
  

Total Debt Service

• Gross debt service (GDS) and total debt service (TDS) are common terms in the world of home or car loans. TDS is the percent of income consumed by monthly obligations such as rent, utility bills, food expenses and car payments. As a simple example, Mr. Smith has an income of $1,000 a month. He pays $300 rent, $100 food and life expenses, $50 credit card payments and $50 for a car payment. Mr. Smith's TDS is 50 percent ($300 + $100 + $50 + $50 = $500, which is 50 percent of his income).
  
  

Gross Debt Service

• Gross debt service is a part of total debt service. GDS is only the percentage of income being consumed by housing expenses. This includes rent, principle and interest on a mortgage, property taxes and expenses directly related to your home. If Mrs. Jones has a salary of $1,000 per month and $300 includes rent, gas, heat, water and all housing expenses, then her GDS is 30 percent.
  
  

GDS and TDS for Loans

• Financial institutions have different guidelines in regard to what they look for when deciding if you are a good candidate for a mortgage or loan. They may look at your GDS, and, if your credit is average, only be willing to allow your GDS to increase to 34 percent. This means that if your salary is $1,000 per month, they will not give you a mortgage where you would have to pay more than $340 per month. They may average your GDS and TDS or only consider the higher figure. Independent mortgage or loan specialists generally can help you calculate your GDS and TDS and find a loan that fits your budget.