Your debt-to-income (DTI) ratio is one of the most important numbers in personal finance, yet many people don’t know theirs. Understanding and tracking your DTI can help you make smarter borrowing decisions, qualify for loans, and avoid financial stress.
What Is DTI and Why Does It Matter?
DTI measures the percentage of your gross monthly income that goes toward debt payments. Lenders use it to assess your ability to manage monthly payments and repay debts. A high DTI can make it harder to qualify for new loans or credit cards and may indicate you’re overextended.
How to Calculate Your DTI?
1. List all your monthly debt payments, including:
● Rent or mortgage
● Auto loans
● Student loans
● Minimum credit card payments
● Personal loans
● Court-ordered payments (child support, alimony)
2. Add up these payments for your total monthly debt obligation.
3. Divide this total by your gross monthly income (income before taxes and deductions).
4. Multiply by 100 to get your DTI as a percentage.
Example: If your debt payments total $1,800 and your gross income is $6,000, your DTI is 30% ($1,800 ÷ $6,000 = 0.3; 0.3 × 100 = 30%)
What’s a Good DTI?
● Under 36%: Generally considered healthy.
● 36–43%: May be acceptable, but some lenders may hesitate.
● Over 43%: Considered high; may indicate financial strain.
Why Track Your DTI?
● Loan Approval: Lenders use DTI to decide if you qualify for mortgages, car loans, or personal loans.
● Financial Health: A high DTI means more of your income goes to debt, leaving less for savings or emergencies.
● Goal Setting: If your DTI is high, focus on paying down debt or increasing income.
Tips for Improving Your DTI
● Pay off small debts to reduce your monthly obligations.
● Avoid taking on new debt.
● Consider consolidating high-interest debts for lower payments.
● Increase your income through side gigs or career advancement
Knowing your DTI empowers you to make smarter financial decisions and puts you on the path to long-term stability.