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What is Debt-to-Income Ratio, and How Do You Calculate It?

4 min read

Published December 17, 2024

Table of contents

Key Takeaways

Debt-to-income ratio is a percentage of how much your monthly income compares to your monthly debt payments.
Debt-to-income ratio is calculated by dividing your total monthly debts (the amount you owe) by your monthly gross income (the amount you make before taxes).
Lenders may not approve new lines of credit if your debt-to-income ratio is too high.

If you're thinking about applying for a new credit card or other type of credit, one of the terms you might hear is “debt-to-income ratio” (DTI ratio). Find out what debt-to-income ratio is, why it’s important when seeking new credit, and how to calculate your debt-to-income ratio.

Debt-to-income ratio

Your DTI ratio provides an overview of how much your monthly debts take up of your overall monthly gross income. Your DTI ratio is typically presented as a percentage.

Why is debt-to-income ratio important?

Your DTI ratio is important because it’s one way lenders may measure your ability to repay the money you borrow, according to the Consumer Financial Protection Bureau (CFPB). Lenders and loan products, such as credit cards, a mortgage loan, or auto loan, may have different DTI ratio requirements to determine if you're eligible for that type of credit.

What is a good debt-to-income ratio?

There’s no specific number that’s a “good” debt-to-income ratio to have.

DTI ratio requirements vary from lender to lender and the type of loan or credit you’re looking for. That said, credit reporting agency TransUnion reports that “lenders generally like to see your DTI around 35% or lower”.

Having too high of a debt-to-income ratio could mean you’re denied a new line of credit.

How do I calculate my debt-to-income ratio?

Now that we know what a DTI ratio is and why it's important, let's review how to calculate your debt-to-income ratio.

Add up your monthly debts: Monthly debt payments include things like your monthly mortgage payment or rent, auto or student loans, and credit card payments. Debt might also include things like child support or alimony, but not things like utilities, gas, or groceries.
Find your gross monthly income: Gross monthly income is how much you earn before things like taxes and other deductions are taken out.
Divide your monthly expenses by your monthly gross income: Finally, divide your total monthly debt by your gross monthly income. Then multiply that by 100 to get the percentage.

For example, if your debts add up to $2,200 per month, and your monthly gross income is $7,000 per month, your debt-to-income ratio is about 31% ($2,200 divided by $7,000, then multiplied by 100).

How to lower your debt-to-income ratio

There are a number of strategies that can help reduce your DTI ratio. One way would be to increase your income, which may happen on its own if you’re due for an annual pay increase. You could also change to a higher-paying job, or take on part-time work.

Other strategies involve reducing debt, which you can do by steadily paying down your existing debt or through a balance transfer if you’re approved.

If you're looking to pay down debt more quickly than simply making your monthly debt payments, there are a couple of strategies you could employ. One is called the debt avalanche method, which may help you save money by paying off the debt with the highest interest rate first.

Or try the debt snowball method, where you make the minimum payment on each of your debts, but you put any extra money you have toward paying off your smallest debt first. When it’s paid off, use the freed-up money to add to the payment for the next lowest debt. As you pay off each, the amount you can use to pay the next debt “snowballs” and may help you pay off all of your debts faster.

For example: Say you have 2 credit cards with a $1,000 and $3,000 balance, a car loan with a $7,000 balance, and a mortgage payment. The debt snowball method says to pay off the $1,000 credit card debt first by making the required minimum monthly payment each month plus any extra you can afford. When it's paid off, take that money and add it to the minimum payment for the other credit card. Continue the process to then pay off the auto loan and finally help in paying off your home loan.

Did you know?

A balance transfer credit card offer may help you lower the amount of interest you pay on your credit cards, which may help you pay off credit card debt faster.

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Does debt-to-income ratio affect your credit score?

The short answer is no, as credit bureaus don’t take your income into account when calculating your credit score. However, if you have a high DTI ratio, it may indicate you also have a high credit utilization ratio, which typically accounts for 30% of your credit score.

Your debt-to-income ratio may be an important number to consider when looking for new lines of credit. If you're concerned it's too high, use a debt reduction strategy to help lower your DTI ratio.

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