If you’re considering taking out a loan, you better be up to speed on your debt-to-income (DTI) ratio. It’s a vital stat that lenders use to determine if you’ll be approved to borrow at all, for how much, and at what rate. Here’s everything you need to know about the number.
As US News reports, your debt-to-income ratio is calculated by dividing your total monthly debt payments by your pre-tax income. If your total monthly debt — including things like a mortgage, auto loan and credit card payments — is $2,000 and you bring in $5,000 per month, your ratio is 40 percent.
Lower is Better
So what’s a good DTI ratio? While the maximum DTI ratio to qualify for a mortgage is 43 percent, a good ratio is generally 36 percent or less.
The Credit Score Impact
While DTI can impact your credit score, a more vital stat here is the credit utilization ratio. That refers to the amount of credit (on each of your cards individually and all of your cards combined) you have used compared to the max amount of credit you have available. Experts advise keeping this ratio below 30 percent.
How to Help
The best way to boost your DTI is…to pay down your debt, of course! Yes, getting paid more might help too, but you can’t depend on that. Pay down that debt and your DTI will take a nice step up.