Decompressing stress around money begins with understanding your finances. One of the most useful numbers in your finances is your debt-to-income ratio.
Your DTI shows how much of your gross monthly income goes to monthly debt payments.
Lenders look at it when you apply for credit or loans. You can use it to tune your own financial wellness.
What is DTI?
You can calculate your DTI by taking your total monthly debt payments and dividing them by your gross monthly income. This is shown as a percentage.
Many lenders are most comfortable at or below 36 percent. Some products you may pursue may allow higher numbers.
It’s a quick formula you can do on a phone that helps you spot potential trouble early. In order to improve this number, you should aim to lower your debt or raise your income.
DTI is not factored into your credit score. However, the same debt that impacts this number may also impact your credit.
What Counts in DTI?
Include housing, auto, personal and student loans, credit card minimums, and court-ordered payments like child support.
Exclude utilities, groceries, insurance premiums not baked into your mortgage, childcare, and retirement contributions.
Use gross income only. If income varies, average the last 6 to 12 months.
How To Calculate?
Let’s look at two examples to understand practically how to calculate and understand the DTI number.
Jasmine is a teacher with a monthly gross income of $4,800. Her debts include $1,000 rent counted as housing, $150 car payment, $100 student loan, and $50 credit card minimums.
In order to calculate DTI, take $1,300 divided by $4,800 to get 27 percent. She is below the 36 percent range, meaning she is in a healthy state to qualify for common loans and credit.
Michele is a delivery driver with a monthly gross income of $5,000. His debts include $1,600 mortgage PITI, $350 auto loan, $250 student loan, and $200 credit card minimums.
In order to calculate DTI, take $2,400 divided by $5,000 to get 50 percent. He is above the 36 percent range, meaning he is in an unhealthy state to qualify for new loans.
So how can Michele lower his score?
- He can start by attacking his balances and pick a payoff path. He will choose the highest rate to cut interest or the smallest balance to build momentum.
- He should avoid taking on any new debt. He should keep credit card spending to a minimum and negotiate the rate terms of his loans.
- In order to raise his income, he can start a side gig, work overtime hours, or look to score a raise at work. Over time, it starts to make a difference!
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Run the math, set a target under 36 percent, and map out the next three moves that will get you there if you are running high, like paying down one balance and trimming one monthly expense.
The clarity you build today lowers stress, keeps cash flow responsibly balanced, and leaves more money in your pocket tomorrow.
