Your guide to debt-to-income ratio

What is a debt-to-income ratio?

A debt-to-income ratio is the number of debt repayments you make each month divided by your income. Lenders use your DTI as one way to make sure you’re in a position to afford to repay a new loan.

Typically, underwriters figure out your DTI themselves. But knowing your ratio before you apply can help you tell if it’s a good time to apply for a loan or credit card. If your ratio is too high, you might want to consider paying off some debt first to avoid high rates or rejected applications.

What is a good debt-to-income ratio?

The lower, the better. More specifically, a DTI of 35% or below is generally considered good — though you might not qualify for a loan with a DTI that’s above 43%.

Why 43%? Lenders came up with this number from mortgage-risk studies that analyzed the type of borrowers who are most likely to have trouble making payments and therefore default on their loans.

Your DTI is a factor lenders consider when determining the rates and terms of your loan. In general, you’re more likely to get a good rate with a lower DTI.

Does my DTI affect my credit score?

Your debt-to-income ratio isn’t included on your credit report and doesn’t directly affect your credit score. However, lenders do consider it before extending credit, including mortgages and auto loans. Credit card companies also use DTI to determine your credit limits.

However, carrying rotating debt — such as a high balance on your credit cards — affects your credit utilization ratio. This is one of the most important factors in calculating your credit score.

Generally, it’s best to keep your credit utilization below 30% on all credit cards. The lower, the better.

Calculating your debt-to-income ratio

Determining your debt-to-income ratio can help you understand your current financial health and how much debt you can comfortably take on.

To calculate your DTI:

1. Add up your monthly total debt. Your debt includes minimum credit card payments and regular monthly payments on personal loans, student loans, car loans, mortgages or any other type of loan. Expenses like groceries, utility bills, streaming services and insurance don’t count as monthly debt.
2. Determine your gross monthly income. This is your income before taxes or deductions are subtracted. Income includes your salary as well as tips or bonuses, pensions, retirement account distributions, Social Security benefits, alimony and child support.
3. Divide your total monthly debt by your gross monthly income. The result is your debt-to-income ratio.

Ask an expert

• Bobby Ritterbeck
• Chief Marketing Officer
• Best Egg

Why do lenders consider my DTI ratio?

Number one for us here at Best Egg is that we believe in responsible lending. That means we don’t ever want to put our customers in financial distress. We want to give consumers the best opportunity to pay their bills each month and still have the money to live their lives.

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How can I lower my DTI ratio?

Americans’ debt burden has been high for a while now: A recent Federal Reserve report estimates the average American household carries $137,063 in debt. You’re probably not alone if your debt-to-income ratio is above or close to the 43% cutoff.

Here are some ways you can tamp down your DTI.

• Pay off your loans ASAP. Getting rid of even one larger monthly debt expense can make a huge difference in lowering your DTI. But understand your loan’s prepayment policy before making any extra repayments. Some come with penalties for paying early, while others require that you follow a specific procedure for successful payoffs.
• Creatively boost your income. You don’t necessarily need to take on a second job to make extra money. Bringing in more cash could be as simple as opening up an eBay store, selling old records or writing online reviews.
• Pay off (or at least pay down) your card balances. Pay what you can beyond your monthly minimum due. The larger your balance, the higher your monthly payment — ultimately increasing your DTI.
• Consolidate your debt. Balance transfer cards or debt consolidation loans at a lower rate can make it easier to retire your debt quickly because you won’t have to pay as much on interest.
• Rent instead of buy. Renting your home isn’t always a smarter financial move in general. But when it comes to keeping your DTI low, it could be: Rent doesn’t count as a debt, whereas mortgage payments do.

Written by

Anna Serio

Editor

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Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

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Anna has written 117 Finder guides across topics including:

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Holly Jennings

Deputy Crypto Editor

Holly Jennings is the deputy crypto editor and updates writer at Finder, working with writers across all niches to deliver quality content to readers. She’s edited hundreds of financial articles ranging from credit cards to investments. With empathy at heart, she especially enjoys content that breaks down complex financial situations into easy-to-understand information. Prior to her role at Finder, she collaborated with dozens of small businesses to maximize the reach and impact of their blog posts, website copy and other content. In her spare time, she is an award-winning author for Penguin Random House, writing about virtual reality worlds, magical girls and lasers that go pew-pew. See full bio

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Holly has written 74 Finder guides across topics including:

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