Your debt-to-income (DTI) ratio is the percentage of your monthly income that you use to pay your debt and the amount of income you have left over after you have paid all of your bills. Creditors use your DTI ratio to get a better understanding of how your current debt impacts your finances and your ability to afford more debt. If your DTI ratio is too high, you could be a seen as a risky borrower. A lower DTI ratio can make you look appealing to creditors, but it can also mean that your finances are freed up to save for the future. Here is everything you need to know about your DTI and what it says about your finances.
Regularly calculating your DTI ratio is a good way to stay on top of your finances and make sure you have set a reasonable budget for yourself. In order to calculate your DTI ratio, add up all your monthly payments you make to pay off debt: credit cards, personal loans, student loans, mortgages, car loans, etc. Then you will divide this number by your gross monthly income (your income before taxes). Then you multiply this number by 100 to turn it into a percentage. So if you put $2,000 towards debts per month and your monthly income is $5,500 before taxes, your DTI ratio would be 36.37%.
What does your DTI ratio say about you?
While every lender has different criteria for what makes a good DTI ratio, these are some general guidelines for how your DTI ratio will impact your creditworthiness:
- DTI ratio below 36%: You will likely not be considered a credit risk by almost any lender. You probably have the means to pay your debts as well as contribute to savings and investments.
- DTI ratio between 37% and 49%: Some creditors may consider you a risky borrower, but others may be ok lending to you. You can likely pay your debts but may struggle to save money or generate wealth through investing.
- DTI ratio above 50%: Most creditors will consider you a borrowing risk. This can make it difficult to obtain new lines of credit. You may be struggling to pay down your debts.
If you find yourself falling in the 37% to 49% range with your DTI ratio, your financial wellbeing could be at risk. This high DTI ratio can make it difficult to pay for emergency expenses or to handle sudden financial changes like a loss of income or a medical emergency. In order to lower your DTI ratio, you need to reduce your debt and/or increase your income.
The best way to get rid of debt quickly is to make more than the minimum payment every month. If you are struggling to make the minimum payments and feel like you need additional help, seeking debt management services may be the right path for you. It is better to get ahead of your debts early before they snowball into a worse situation.
If you are concerned about a high debt-to-income ratio or are struggling to pay off your debts, Veitengruber Law can help. Our debt management solutions are catered to fit your specific needs. We can help you understand your options and work towards your financial goals.