If you are thinking about applying for a loan or credit card, there’s a number you should know before you hit submit. That is your debt-to-income (DTI) ratio. Your DTI ratio helps lenders determine whether you qualify for new credit and what terms you may receive. Let’s break it down in simple terms so you can feel confident in your financial choices and stay ahead of your finances.
What is a debt-to-income ratio?
Your debt-to-income ratio compares how much you pay toward debt each month to how much you earn each month. In other words, it answers the question, “How much of my income is already committed to debt?”
To calculate your DTI ratio:
- Add up your total monthly debt payments.
- Divide that number by your gross monthly income, which is your income before taxes.
- Multiply the result by 100 to get a percentage.
You can also use a debt-to-income ratio calculator tool to make the process even easier.
What counts as debt?
When calculating your DTI ratio, include required monthly debt payments such as:
- Mortgage or rent
- Credit card minimums
- Auto loans
- Student loans
- Personal loans
- Child support or alimony
Do not include everyday expenses like groceries, utilities, or insurance unless they are structured as debt.
Why debt-to-income ratio is important
Your DTI ratio is one of the main factors that lenders review when you apply for credit. It helps them assess your ability to take on and repay additional debt.
Lenders use this ratio to:
- Decide whether to approve your loan application
- Determine how much you can borrow
- Help set your interest rate or annual percentage rate (APR)
A lower DTI ratio generally signals that you have room in your budget to handle new payments. A higher DTI ratio may suggest that your budget is already stretched.
Outside of borrowing, your DTI ratio can give you insight into your financial stability and help you gain a clearer picture of your overall financial health.
What is considered a good debt-to-income ratio?
There is no universal “perfect” DTI ratio. Different lenders have different guidelines. However, there are general benchmarks that many financial institutions use.
36% or less
A debt-to-income ratio of 36% or lower is often considered healthy. This means 36% or less of your gross monthly income goes toward debt payments.
At this level, lenders may view you as a strong candidate for new credit because a manageable portion of your income is already allocated to debt.
Below 43%
A DTI ratio under 43% is commonly used as a guideline for mortgage approval. Many lenders prefer borrowers to stay below this threshold.
If your ratio falls between 36% and 43%, you may still qualify for credit. However, lowering it could strengthen your application and improve your options.
43% or higher
If your DTI ratio is 43% or higher, lenders may see you as higher risk. This does not mean you cannot qualify for credit, but you may face stricter requirements or higher interest rates.
At this level, your monthly payments may be putting pressure on your budget. Reducing your debt could help improve your financial flexibility and give your budget some breathing room.
Real-life debt-to-income examples
Sometimes it helps to see the numbers in action.
Example 1: Higher Debt-to-income
- Gross monthly income: $4,500
- Total monthly debt payments: $2,000
$2,000 ÷ $4,500 = 0.44
DTI ratio: 44%
With a DTI ratio of 44%, some lenders may hesitate to extend new credit. Others may require additional documentation or offer less favorable terms.
Example 2: Moderate Debt-to-income
- Gross monthly income: $2,000
- Total monthly debt payments: $650
$650 ÷ $2,000 = 0.325
DTI ratio: 32.5%
At 32.5%, this borrower is using less than one-third of their income for debt. Many lenders would consider this a solid financial position.
Example 3: Lower Debt-to-income
- Gross monthly income: $3,500
- Total monthly debt payments: $1,000
$1,000 ÷ $3,500 = 0.28
DTI ratio: 28%
A DTI of 28% is generally viewed as strong. This borrower may have a better chance of qualifying for loans or credit cards with competitive terms.
Knowing your DTI ratio before you apply for credit can help prevent surprises and allow you to plan your next steps.
Debt-to-income ratio vs. credit score
It is easy to confuse your DTI ratio with your credit score, but they measure different things.
Your credit score reflects your credit history. It considers factors such as:
- Payment history
- Credit utilization
- Length of credit history
- Types of credit accounts
Your DTI ratio focuses on your current income compared to your current debt obligations.
Lenders often look at both. A strong credit score and a healthy DTI ratio together may strengthen your application. However, even if one is less than ideal, you may still have options.
How to improve your debt-to-income ratio
If your DTI ratio is higher than you would like, don’t worry. There are clear steps you can take to improve it.
Because your debt-to-income ratio is based on 2 numbers (debt and income), you can improve it by reducing debt, increasing income, or both.
1. Pay down existing debt
Reducing your outstanding balances is one of the most direct ways to lower your debt-to-income ratio.
Focus on:
- Paying more than the minimum on high-interest credit cards
- Using a structured repayment strategy such as the snowball or avalanche method
- Avoiding new debt while you pay down existing balances
2. Increase your income
Since your debt-to-income ratio compares debt to income, raising your income can improve your ratio even if your debt stays the same.
Consider options such as:
- Asking for a raise if your performance supports it
- Taking on freelance or contract work
- Starting a side hustle based on your skills or interests
- Exploring part-time opportunities
Even temporary income boosts can help you pay down balances faster and reduce your DTI ratio over time.
3. Avoid taking on new debt
If you plan to apply for a mortgage or other major loan soon, try to avoid opening new credit accounts beforehand. Adding new monthly payments increases your debt-to-income ratio and could affect your approval odds.
Instead, focus on stabilizing or lowering your current obligations.
How often should you check your debt-to-income ratio?
It is a good idea to review your DTI ratio:
- Before applying for a loan
- After paying off a major balance
- When your income changes
- At least once or twice a year as part of your financial check-in
Regularly monitoring your ratio helps you stay proactive and plan your next moves with a strong money mindset.
Your debt-to-income ratio is a powerful planning tool
Understand that your DTI ratio is more than just a number lenders use. It’s a practical tool to help you to get ahead in your financial health.
When you know your debt-to-income ratio, you can:
- Assess whether you are ready for new credit
- Identify areas where your budget may feel tight
- Set realistic goals to improve your financial flexibility
Even if your debt-to-income ratio is not where you want it to be today, you can take action. By paying down debt, increasing income, and making thoughtful financial decisions, your ratio could improve over time.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
