By NerdWallet | Jan 30, 2024
Debt-to-income ratio shows how your debt stacks up against your income. Lenders use DTI to assess your ability to repay a loan.
Nerdy takeaways
- Debt-to-income ratio represents the percentage of your monthly income that goes to debt payments.
- Lenders use DTI — along with credit history and other factors — to evaluate if a borrower can repay a loan.
- Lenders have different DTI requirements. Personal loan companies may allow higher DTIs than mortgage lenders.
Debt-to-income ratio divides your total monthly debt payments by your gross monthly income, giving you a percentage. Here’s what to know about DTI and how to calculate it.
How to calculate your debt-to-income ratio
To manually calculate DTI, divide your total monthly debt payments by your monthly income before taxes and deductions are taken out. Multiply that number by 100 to get your DTI expressed as a percentage.
Here’s an example: A borrower with rent of $1,200, a car payment of $400, a minimum credit card payment of $200, and a gross monthly income of $6,000 has a debt-to-income ratio of 30%. In this example, $1,800 is the sum of all debt payments. When you divide $1,800 by $6,000 and then multiply that answer by 100, you get 30.
To get the most accurate DTI ratio, make sure to include all your debt payments and income sources.
Debt payments can include:
- Rent or mortgage payments.
- Auto loan payments.
- Student loan payments.
- Minimum credit card payments.
- Personal loan payments.
- Other debt payments, such as the minimum payment on a home equity line of credit.
- Child support, alimony, or other court-ordered payments.
Don’t include other monthly expenses, such as:
- Groceries.
- Gas.
- Utility payments.
- Phone bills.
- Health insurance.
- Auto insurance.
- Child care payments.
- Recreational spending.
Include all sources of income, such as:
- Salary from full-time work.
- Part-time wages.
- Freelance income.
- Bonuses.
- Child support or alimony received.
- Social security benefits.
- Rental property income.
How lenders view your DTI ratio
Lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making consistent payments.
Each lender sets its own DTI requirement, but not all creditors publish them. Generally, a personal loan can have a higher allowable maximum DTI than a mortgage.
You may find personal loan companies willing to lend money to consumers with debt-to-income ratios of 50% or more, and some exclude mortgage debt from the DTI calculation. That’s because one of the most common uses of personal loans is to consolidate credit card debt, which can help you pay off debt faster and lower your DTI.
Does your DTI affect your credit score?
Your debt-to-income ratio does not affect your credit scores; credit-reporting agencies may know your income, but they don’t include it in their calculations.
Credit utilization, or the amount of credit you’re using compared with your credit limits, does affect your credit scores. Credit reporting agencies know your available credit limits, both on individual loan accounts and in total. Most experts advise keeping the balances on your cards no higher than 30% of your credit limit, and lower is better.
How to understand DTI ratio
DTI can help you determine how to handle your debt and whether you have too much debt.
Here’s a general breakdown:
- DTI is less than 36%: Your debt is likely manageable, relative to your income. You shouldn’t have trouble accessing new lines of credit.
- DTI is 36% to 42%: This level of debt could cause lenders concern, and you may have trouble borrowing money. Consider paying down what you owe. You can probably take a do-it-yourself approach; two common methods are debt avalanche and debt snowball.
- DTI is 43% to 50%: Paying off this level of debt may be difficult, and some creditors may decline applications for more credit. If you have primarily credit card debt, consider a credit card consolidation loan. You may also want to look into a debt management plan from a nonprofit credit counseling agency. Such agencies typically offer free consultations and will help you understand all of your debt relief options.
- DTI is over 50%: Paying down this level of debt will be difficult, and your borrowing options will be limited. Weigh different debt relief options, including bankruptcy, which may be the fastest and least damaging option.
Ways to lower your DTI ratio
Reduce your debt-to-income ratio to improve your chances of qualifying for future credit.
- Increase your income. Make more money by selling items online or starting a side gig, even for a short period, like babysitting or dog walking.
- Reduce your debt. Paying down your credit card balance can reduce your minimum monthly payments. Your DTI will also go down if you pay off installment loans, like student loans or a car loan.
- Refinance or consolidate debt. Refinancing or consolidating debt at a lower interest rate could lower your monthly payments and therefore reduce your DTI. Negotiating a longer repayment term could also lower your monthly debt payments, though you may wind up paying more interest over time.
- Avoid taking on additional debt. Try not to add to your credit card balance or take out additional loans if you want to lower your DTI.
