Your debt-to-income ratio (DTI) is a simple formula that compares how much you owe each month to how much you earn. Understanding this number can help you take control of your financial situation — and perhaps your ability to borrow money.
In this article, we’ll answer common questions about DTI ratios, including what they are, why they matter, how to calculate yours and steps to improve it.
What is a debt-to-income ratio?
A debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward paying monthly debt. It includes payments such as your rent or mortgage, credit cards, car loans, personal loans and student loans. Your gross income is what you earn before taxes and deductions.
Why does your debt-to-income ratio matter?
Your debt-to-income ratio matters to lenders because it provides them with a way to gauge whether you can handle more credit or loan payments. A lower DTI ratio signals you’re managing debt well, while a higher DTI ratio might suggest that you might struggle with additional future or monthly payments.
While your DTI ratio doesn’t factor into your credit score, or appear on your credit report, a lower DTI could underscore other factors that do affect your credit score:
Payment and credit history. A tight budget can lead to missed or late payments, which has the biggest negative impact on scores.
Credit utilization. If high DTI pushes you to rely on credit cards, your balances (and utilization) can rise. Keeping credit utilization low (often below 30%) can help protect scores.
New credit. If you apply for more credit for help paying bills, it can trigger hard inquiries and new accounts, which can cause a small, temporary dip.
As a borrower, managing your overall debt-to-credit ratio could help to make it easier to pay on time and keep balances in check—two habits that support a stronger credit score.
Your debt-to-income ratio is also a snapshot of your financial health. If too much of your income goes toward high-interest debt like credit card repayments, you might have less flexibility for savings or emergencies.
What’s considered a good debt-to-income ratio?
A good debt-to-income ratio is often considered 35% or less — this level is viewed by many lenders as a healthy balance between your debts and income. Some lenders may go higher under certain conditions.
According to the Consumer Financial Protection Bureau (CFPB), different loan products may have different limits, but many lenders view DTIs above 35% as riskier as it can affect their ability to repay. Under federal guidelines, a consumer’s total monthly debt payments generally should not exceed 43% of gross monthly income to qualify for a “qualified mortgage.”
How do I calculate my debt-to-income ratio?
To calculate your own debt-to-income ratio, follow these four simple steps:
1. List your monthly debt payments.
Include your total monthly housing costs, credit cards, car loans, student loan payments, personal loans and any other recurring debt obligations like child support, alimony or property taxes. Use the required minimum payment for each.
2. Add them up.
This is your total monthly current debt.
3. Find your gross monthly income.
Use your income before taxes and deductions.
4. Divide and multiply.
Divide total debt by gross income, then multiply by 100.
Let’s put the debt-to-income ratio formula to work with an example — so you can see how this formula actually works.
Formula:
Monthly debt payments ÷ Gross monthly income × 100 = DTI
Example:
- Rent: $1,200
- Credit card: $200
- Auto loan: $300
- Student loan: $100
- Total debt = $1,800
- Gross income = $4,500
DTI = (1,800 ÷ 4,500) × 100 = 40%
If you pay $1,800 in debt each month and earn $4,500 in gross income, your DTI is 40%.
How do I lower my debt-to-income ratio?
You can lower your debt-to-income ratio by either reducing your debt and living expenses, or increasing your income — or ideally, both. Small and practical steps you can take include:
Avoid debt. Cancel an unused subscription or call your service providers (internet, phone, insurance) to ask for better rates. Put those savings toward debt.
Pay more than the minimum. When it comes to credit card debt, paying an extra $25 – $50 toward a credit card balance could help lower next month’s minimum payment.
Press pause on new borrowing. Hold off on opening any new debt or accounts to keep your monthly payments from growing.
Find a way to increase your income. One overtime shift, a side hustle, or selling unused items can give you more money to reduce a balance.
Get support if needed. A nonprofit credit counselor can help negotiate lower rates and build one affordable payment plan.
Pick one step you can do this month, then add another when you’re ready — consistent progress, even small steps, can gradually improve your DTI ratio.
Final Thoughts
Your debt-to-income ratio is a key measure of financial health. It shows how much of your income goes toward debt and whether that balance leaves room for your goals. By calculating and improving your DTI, you can strengthen your financial stability and increase your eligibility for qualifying for credit on better terms.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
