Your debt-to-income ratio is an important financial number to know. Not only can it affect what loans and other financial products you qualify for, but it can influence your interest rate — or what you pay for those products — too.
Your DTI can also tell you a lot about your financial health and how well you’re managing your debts.
Are you curious how your debt-to-income ratio measures up and what it means for your goals? Here’s what you need to know.
What is a debt-to-income ratio?
Your debt-to-income ratio, also referred to as DTI, is a numerical representation of how much of your earnings goes toward paying your debts. It’s calculated by taking your total monthly debt obligations — so, your credit card payments, car payment, mortgage payment, student loan payment, etc. — and dividing that number by your monthly income. You then multiply by 100 to get a percentage, and the higher the percentage, the more of your income your debts take up.
Here’s an example: Say you bring in $6,000 a month, and your monthly debt payments total $1,500. You’d divide 1,500 by 6,000 to get 0.25 — a 25% debt-to-income ratio. This means that 25% of your monthly income is going toward debts. (If you don’t want to do the manual calculations, you can use an online debt-to-income calculator instead.)
Why DTI matters
DTI is important because lenders consider it when you apply for a credit card, loan, mortgage or other financial product. The reasons are many: For one, it tells the lender what you can comfortably afford to pay each month on your payment. It also speaks to how responsible you are with your cash (typically, the higher your DTI, the more you’ve let your debts get out of hand, while a lower DTI shows you manage your debts responsibly).
Lenders may also consider DTI when setting your interest rate, as higher DTIs tend to indicate a borrower is less likely to make their payments. You’d then get a higher interest rate — and, thus, higher monthly payment — to account for that extra risk.
What’s a good debt-to-income ratio?
All financial products and lenders have different DTI requirements. For certain mortgages, for example, you may need a 36% DTI or lower to qualify. For other products, it could be higher or lower.
According to Experian, a “good” DTI is one that’s 35% or less. In February 2024, the average household debt was $1,225 per month, Experian says. With the average American making about $1,185 per week — or more than $4,700 per month, most people fall well below the good cutoff, with a DTI of about 26%.
How DTI impacts your debt consolidation options
Since DTI plays a role in what financial products you can qualify for, it can affect what options you have for consolidating your debt, too. Home equity loans and home equity lines of credit (HELOCs), for instance, are popular tools for debt consolidation, but lenders have strict DTI requirements for these products to ensure you don’t overextend yourself. The exact requirements vary by lender, but with most banks, you can expect to need a DTI of 43% or below.
Personal loans and balance transfer cards, other common options for consolidating debt, may require even lower DTIs, as these are unsecured products. They aren’t backed by an asset the lender can seize and sell if you fail to make payments. This makes them a higher risk — hence the stricter DTI requirements.
How to improve your DTI
Fortunately, debt-to-income ratios are an always changing thing. So, if your DTI is too high for a loan or card you want to apply for, there are steps you can take to improve it.
You can reduce your debts, find ways to increase your income, negotiate with your creditors for a lower interest rate, and double-check your credit report to ensure all the numbers are correct (and dispute them if they aren’t).
Finally, stop adding to your balances and commit to putting any windfalls you get toward your debts. This might mean a holiday bonus you get from work, your annual tax refund or just money you get in birthday cards this year. Any reduction in your debt can help lower your DTI and make it easier to qualify.
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