What is Debt-to-Income Ratio?

Lenders may use your DTI to determine their risk in lending to you. In other words, your debt-to-income ratio is a measure of your creditworthiness.

In general, the more you need to spend each month to pay off your existing debt, the less confident lenders will be in your ability to keep up with the payments on any new debt. The less debt you have compared to your income, the more likely it is that lenders will trust you to safely manage new debt.

What is included in a debt-to-income ratio?

Your DTI ratio compares your monthly bill payments to your gross monthly income. It accounts for all monthly recurring debt and expenses, such as housing, credit cards, and other loans.

How can you calculate my debt-to-income ratio?

To estimate your DTI, you can use an online debt-to-income calculator or pencil and paper.

First, gather your bills. You should include any of the following payments that apply:

• Full mortgage payment (including principal, interest, taxes, insurance, and any homeowner association fees) or rent payment
• Car payment
• Student loan payment
• Personal loan payment
• Minimum required payments on all credit cards or lines of credit
• Child support or alimony payments
• Any other monthly debt obligations

Then, figure out your monthly gross household income from employment and any additional sources of income, such as self-employment. Your gross income would be your total earnings before taxes and deductions. For your household, it would include the gross income of all earners. 

Your DTI is the total amount of all these monthly expenses divided by your gross income. (You don’t need to include your discretionary spending or things that fluctuate such as your gas or grocery bills.)

Formula for debt-to-income ratio calculation

For example, if your total monthly debt payments come to $1,050 and your gross monthly income is $3,000, your DTI would be 35%. 

Why does debt-to-income ratio matter?

Your DTI is important because it gives an immediate snapshot of your financial situation. If your DTI is too high, you might struggle to cover your daily expenses, let alone save for important financial goals.

In addition, your DTI can make the difference between loan approval and rejection. It’s a strong indicator of whether you can afford to add new payments to your monthly budget. A high DTI could make it more difficult to qualify for a mortgage, car loan, or other kind of loan.

To lower your DTI it is important to reduce your debt. Paying down credit cards or other loans may help you reduce your monthly payments and set you up for a rewarding future.

You could start by consolidating higher-interest debt from credit cards into a fixed-rate, fixed-term personal loan. This may help you pay off your debt faster and save money on interest.

What is a good debt-to-income ratio?

Ideally, you want your DTI to be as low as possible because that indicates that your income is well above what you need for recurring expenses.

If you’re applying for a personal loan, lenders typically want to see a DTI that is less than 36%. They might allow a higher DTI, though, if you also have good credit or other compensating factors, like a savings account large enough to cover several months of living expenses.

What does your debt-to-income ratio mean?

As lenders review your loan application, it’s important to understand what they’re looking for. 

According to NerdWallet,¹ if your DTI is:

• less than 36%: your debt is likely manageable relative to your income;
• 36%–42%: this level of debt could cause lenders concern, and you may have trouble borrowing money;
• 43%–50%: paying off this level of debt may be difficult, and some creditors could decline your application;
• over 50%: paying down this level of debt will be difficult, and your borrowing options may be limited.

How can you lower your debt-to-income ratio?

To change your DTI, you will need to reduce your debt payments, increase your income, or do both.

For example, if you find that your DTI is too high to qualify for the loan you want, look at what you spend and what you owe. Where can you save? Are your adult kids still on your cell phone bill? Do you have a streaming service or gym membership you’re not using? Can you make your coffee at home? You’d be surprised by how impactful paying attention and making small tweaks to your spending habits can be.

If you have higher-interest debt, you could save money by consolidating those bills into one fixed-rate personal loan with a set regular monthly payment. If you get a personal loan at a lower interest rate than you had been paying, you will reduce your overall debt load and lower your DTI.

How can you reduce high-interest credit card debt?

Credit cards are a convenient way to pay for daily expenses and they can help you build credit. But the average APR for credit cards was 27.7% in June 2024.² So if you find yourself struggling to keep up with your payments, it may be time to rethink how you manage this type of debt.

It’s never a bad idea to reduce higher-interest debt. Paying your credit cards off monthly is a great way to keep revolving debt low. If that’s not always possible, try to pay a bit more than the minimum each month. If your higher-interest debt becomes unmanageable, you can consider a personal loan for debt consolidation.

Be sure to compare interest rates, repayment terms, and the monthly payment amount to determine what is the best debt consolidation tool for your financial situation..

With a Discover® personal loan you can design your loan around you. Pick the amount you need and the repayment term you want to fit your budget. For example, if you get approved for a $15,000 loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month.

Now imagine that same amount in credit card debt. With a 20% APR and a minimum payment of 3% of the balance per month, it would take more than 25 years to completely repay the balance owed, including accrued interest of about $18,361.³

With a personal loan, even if interest rates fluctuate, your loan will be locked at a fixed rate that won’t increase—and that could help you stick to your budget and lower your debt-to-income ratio.

Looking for more ways to improve your credit health? Start by making a financial plan.

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