Gearing Ratio

"Gearing." Think: British for leverage or debt.

You want to buy a house, so you begin looking at your equity and your debts to find the ratio of the two. You look at everything you owe verses the income you have to determine how much you can afford. When you approach the bank for a home loan, the banker will do the same thing to determine the risk of you not being able to pay that loan.

Many different factors are involved in looking at your gearing ratio. It's what companies like Credit Karma and Credit Sesame do when evaluating your credit score. If you know your ratio, you can take the steps necessary to show that you're not a financial risk, such as paying your debts on time.