There is a number that is just as important as your credit score: Debt-to-income ratio (DTI). DTI determines the amount of your monthly income which goes towards your debt payments, and it is a figure that is often considered when you are applying for loans. Understanding your DTI—and what steps you can take to improve it—can set you up for more lending opportunities, better rates, and overall stronger financial health.

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What is the Debt-to-Income Ratio?

Your debt-to-income (DTI) determines how much of your income goes towards debt payments. Debt payments are anything that you are required to pay monthly. Common examples of debt payments include rent payments, mortgage payments, credit card bills, student loans, and more. DTI can give you a snapshot of your current financial situation. It shows how much financial flexibility you have and can also impact your ability to obtain a loan and the loan rates you may qualify for.

What is an Ideal Debt-to-Income Ratio?

The lower your DTI, the more creditworthy you appear to lenders. A DTI below 36% is considered good, but a DTI under 28% is even better. Having a low DTI is an indicator of good financial health because it demonstrates your ability to manage finances responsibly.

The benefits of a low DTI include:

  • It’s Easier to Get a Loan: Lenders use DTI as a factor for approving loans. A lower DTI increases a borrower’s chance of obtaining a loan since it shows the borrower is more likely to repay the loan due to financial discipline.
  • You May Receive Better Rates and Terms: Borrowers with a lower DTI are seen as more financially responsible since low DTI proves borrowers are likely financially stable and can manage debt.
  • You May Be Approved for Larger Loans: Increasing borrowing power is a perk of low DTI. A lender is more likely to give larger loans to borrowers with lower DTI, as they are more likely to have more disposable income and the ability to take on more debt.
  • Increased Financial Freedom: DTI is used as a snapshot to determine your current financial situation, and having a lower DTI shows you have more financial flexibility.

What are the Disadvantages of a High Debt-to-Income Ratio?

Since DTI is used as a snapshot of your current financial situation, people with a higher DTI ratio may face more financial hurdles. Common disadvantages of a high DTI ratio can include:

  • Difficulty Securing Loans: Lenders prefer a lower DTI. Anything above 36% may potentially limit your borrowing options, as those with a high DTI ratio may not qualify for a loan.
  • Reduce Borrowing Power: Lenders may only offer borrowers with higher DTI ratios lower loan limits or loans with higher rates that may make borrowing more difficult to afford.
  • Higher Interest Rates: If a borrower with a high DTI obtains a loan, they are more likely to have higher interest rates on their loans to mitigate the risks a lender would take on.
  • Challenge Covering Financial Emergencies: When a large portion of your monthly budget is spent on debt payments, it may be difficult to save money and to be able to deal with unexpected expenses.

If you have a higher DTI ratio, you should not be discouraged. It is possible to lower your DTI ratio and improve your financial health.

How Can I Lower my Debt-to-Income (DTI) Ratio?

Improving your financial health and borrowing potential can be done by lowering your debt-to-income ratio. To take advantage of the benefits of a lower DTI, you can take steps to lower and maintain yours:

  • Pay Off Debt: Your debt-to-income ratio improves when you have less debt. Paying off debt sooner can be possible with budgeting and finding ways to cut out unnecessary expenses.
  • Increase Your Income: Whether it is getting a raise, taking on a side gig, or finding another job, increasing your income can help you pay off loans sooner and lower your DTI.
  • Consolidate or Refinance Debt: Cut down on the amount of loans you need to pay back by consolidating debt into a single loan with a potentially lower payment or refinancing debt to a lower interest rate.
  • Avoid Unnecessary Loans: Loans are a great way to finance larger purchases. However, taking out loans can raise DTI. Weigh all options before obtaining a loan.

How Do I Find My Debt-to-Income Ratio?

Finding your debt-to-income ratio is easy. Simply add up all of your required monthly debt payments and divide the total by your gross monthly income (before taxes) and multiply that total by 100. Otherwise, some financial institutions offer the ability to uncover your DTI for you within Digital Banking without needing to do a lot of math.

Credit Union 1 members can find their debt-to-income ratio within the Credit Score tool in Digital Banking. Credit Score is free to use for all members.

To access Credit Score and find your DTI, log in to CU1’s Digital Banking. If you are not yet a member, open an account online to get started.