April 19th, 2018 6:56 AM by Jackie A. Graves, President
Your credit score matters (especially if it’s low), but it’s not
the only number that you should care about when it comes to your money. If
you’re paying off debt, for example, you want to be aware of something called
your debt-to-income ratio. It doesn’t just affect your ability to
get loans; it’s also just a good overall measure of your financial health.
your debt-to-income (DTI) ratio?
Generally speaking, your debt to income ratio is pretty much
what it sounds like: the ratio of debt you have divided by your gross monthly
income. Whereas your credit report and score doesn’t include any details about
your income relative to your debt load, that’s exactly what your DTI ratio is
“DTI is a more holistic way to see if you’re living within your
means because it provides a true view of your monthly debt obligations relative
to your monthly income,” says Erin Lowry, author of Broke Millennial. “A credit
score is certainly a piece of your financial profile, but not the full picture.
For example, you can be heavily burdened with debt and still have a strong
If your DTI ratio is high, lenders might not loan you money or
credit, or they may give you worse interest rates, even if your credit score is
in shape. This doesn’t really matter if you’re not shopping for a loan or
credit card, but you still want to avoid a high DTI ratio if only because a
higher ratio means you’ll have a harder time paying back your debt.
calculate your DTI ratio
It’s pretty easy to calculate your own DTI ratio, but there are
online tools that will do it for you automatically and keep track of it, too.
Intuit’s newly released Turbo app, for example, monitors your credit score but
also tracks your DTI ratio and gives you personalized advice. If you’re already
a TurboTax or Mint.com user, you can use your login credentials to try Turbo
If you want to do the math yourself, it’s simple:
"DTI ratio is a simple formula. Divide your monthly debt
obligations divided by your gross monthly income, and multiply that number
times 100,” says Lowry, who partnered with Turbo.
For example: Let’s say you pay $200 a month in student loans,
$850 on rent and $120 for your auto loan. Your monthly gross income is $3,500.
($200 + $850 + $120) ÷ ($3,500) = 0.3342
Then, x 100
= 33.42 percent
When you’re applying for a mortgage, be aware of something
called your household ratio in addition to your DTI ratio
(which can also be referred to as your back-end ratio.) Your household ratio is
the amount of your home-related expenses (including property tax, prospective
mortgage, insurance, etc.) divided by your monthly income.
“While mortgage lenders typically look at both types of DTI, the
back-end ratio often holds more sway because it takes into account your entire
debt load,” Nerdwallet says.
“ideal” DTI ratio
Ideally, you want to keep your DTI at 36 percent or less, Lowry
says. At least, that’s a ballpark figure lenders look for when deciding your
creditworthiness. According to Nerdwallet, mortgage lenders also prefer a
household ratio that’s even lower.
“Lenders tend to focus on the back-end ratio for conventional
mortgages, loans that are offered by banks or online mortgage lenders rather
than a government program,” they report. “If your front-end DTI is below 28
percent, that’s great. If your back-end DTI is below 36 percent, that’s even
Of course, you should aim for a DTI ratio of 0 percent if your
goal is to be debt free. Either way, it’s another number to keep tabs on,
beyond your credit score.
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