What Does Debt-To-Income Mean?
Debt-to-income is a ratio that weighs how much debt you have in relation to your gross monthly income. Lenders use this ratio when they are deciding whether or not to approve someone for credit. To calculate your DTI (debt-to-income) ratio, add up all your recurring debt (loans, credit cards, and housing expenses), then divide that total by your gross monthly income.
Where Should Your Debt-To-Income Ratio Be?
It is recommended that the debt-to-income ratio be kept below 50% for some personal loans, and even lower when applying for mortgages. Each lender will have their own parameters for an acceptable DTI percentage, but we know that the lower the ratio is, the better your chances are of being approved. A good goal is to aim to be below 36% DTI.
Having a low DTI gives the perception that you handle your money well and are not in danger of being financially over-extended. In short, it makes lenders feel that you are more likely to repay a debt because you do not have a lot of other financial obligations. Although it is good to understand from a lender’s perspective, it is also good for us to be aware of our personal DTI ratios.
It is easy to get buried in debt; if you borrow too much, it only takes one more debt to put yourself into a tight financial situation.
4 Quick Tips to Keep Your DTI Low
1. Keep up with a budget.
2. Pay off one loan before you get another one.
3. Keep credit card balances under 30% of the credit limit.
4. Only buy what you can afford.