If you’re denied a credit card due to a high debt-to-income ratio, there may be other types of cards you may qualify for. But the best option is often to look toward the long term and steadily pay off your debt.
What is debt-to-income ratio?
Debt-to-income ratio is the percentage of your gross monthly income that you use for debt payments.
Debt includes payments for rent and mortgage, alimony and child support, student loans, auto loans and similar expenses. It usually doesn’t include costs such as groceries, gas, utilities and taxes.
What is a high debt-to-income ratio?
A debt-to-income (DTI) ratio of 40% or more is considered high, and it often indicates financial stress. A good DTI ratio is generally considered 36% or less.
Card providers are essentially in the lending business, and they want to be relatively sure they’ll be repaid. To that end, they’ll check your DTI ratio to gauge your ability to pay your credit card bill. If you have a high DTI ratio, you have reduced odds of getting approved for a card.
Calculate your debt-to-income ratio
To calculate your DTI ratio, you’ll need 2 pieces of information:
Your gross monthly income — that is, your monthly income before taxes.
Your monthly debt payments.
Divide your monthly debt payments by your gross monthly income.
Here’s an example
Let’s say you make $60,000 a year, which comes out to $5,000 a month before taxes.
Each month, you pay $1,200 in rent, $200 in car payments and $250 in credit card payments. In total, your monthly debt is $1,650.
To get your DTI ratio, divide $1,650 by $5,000. That comes out to 33%.
You can quickly plug in details such as your credit card, car loan and mortgage payments, as well as your monthly income. Our calculator will do the rest, showing your DTI ratio and how it looks to creditors.
What to do if you’re denied a credit card due to a high debt-to-income ratio
If a high DTI ratio is the culprit for your credit card denial, work on paying down your debt. Many other lenders will find the same weakness in your application, so it’s wise to improve your DTI ratio before applying for another card.
As you lower your debt, you’ll likely find not only that your DTI ratio improves, but your credit score increases as well. These are 2 wins that will give you much better odds of approval for a credit card.
You may still qualify for other credit cards
If you’re set on getting a credit card, consider a secured card. This requires a security deposit, which a provider can use to cover your debt if you fail to make payments. For this reason, providers are often more willing to offer this card type to individuals they deem riskier customers.
You might also compare store credit cards, which may be accessible even if your finances are less than perfect.
Compare credit cards for applicants with poor credit
Here are a few great credit cards to consider if you’ve had trouble getting approved. Still, you may want to improve your DTI ratio first, as a high ratio often indicates larger financial problems.
How to improve your debt-to-income ratio
It’s wise to take your high debt-to-income ratio seriously, as it could have a big effect on your life.
Because there’s stress on your finances, just one unfortunate financial event — a job loss, car breakdown, etc. — could send you into deep trouble. A high DTI ratio may also keep you from advancing your financial life, as it’ll complicate your path to getting credit cards and loans.
Consider taking the hard path and tackling your DTI ratio now. With some sacrifice today, you can steadily build strong finances.
Here are a few ways to improve your DTI ratio
Increase your income. People often talk about reducing spending, but often overlooked is simply increasing your income. There are many ways to make more money, such as driving for rideshare services, freelancing or creating an online store. Working on side projects in your spare time can help you slowly lower your DTI ratio.
Put more of your monthly income toward your debt. If you have high monthly payments toward debt — for example, with credit cards — you can reduce them simply by paying off what you owe. This might take a while, but you’ll ultimately lower your monthly payments and accrue less in interest.
See where you can reduce monthly spending. By selectively cutting back, you can have more money to put toward your debt
Downsize. Especially if you have high debt payments for housing, your car or other expenses, you may be able to reduce your monthly burden by living below your means.
Bottom line
Getting denied for a credit card stings. By improving your DTI ratio, however, you can increase your odds for your next application. Consider opening a savings account and putting more of your income toward paying off your debt.
Frequently asked questions
Your DTI ratio does not affect your credit score. However, carrying high debt on credit cards will lower your score because it increases your credit utilization ratio.
Carrying credit card debt will contribute to a higher DTI ratio. Additionally, you’ll accrue interest each month that could add to your debt faster than you think.
One great way to save money is by paying yourself first. The idea is you automatically move a portion of each paycheck into your savings account, or directly toward debt payments. By making money less accessible to you right away, you make it more difficult for you to spend money.
Each week, examine your credit or debit transactions and identify expenses you can cut. Consider also using budgeting tools to help you keep your spending in check. Lastly, examine your financial mindset — including gaps in your financial knowledge as well as why you’re tempted to spend.
Kevin Joey Chen is a credit cards, banking and investments writer whose work and analysis have appeared on CNN, U.S. News & World Report, Business.com, Lifehacker and CreditCards.com. He's passionate about helping you get your finances in order by expertly navigating cutting-edge financial tools — including credit cards, apps and budgeting software.
About half of Canadians, or around 18 million, carry a balance on their credit card. 10.5 million of these Canadians are stressed about their pandemic debt. Find out who has the most debt stress and what they are willing to do about it.
It’s impossible to predict the future, but you can build a rainy day fund and provide financial security for yourself and your family no matter what unexpected expenses arise.
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