Differences Between Debt-to-Income & Credit Utilization Ratios

Courtney Dodson

What is a debt-to-income (DTI) ratio?

Your debt-to-income (DTI) ratio is your total monthly debt payment divided by your monthly gross income. Your monthly gross income is generally the amount of money you’ve earned each month before taxes and any other deductions are taken out. To calculate your DTI ratio, you simply add up your monthly debt payments and divide them by your gross monthly income. 

Total Monthly ÷ Debt Payment Gross Monthly Income = DTI Ratio

Imagine that your rent or mortgage costs $1,200 per month, your auto loan is $200 per month, and you pay $100 towards a student loan each month, making your monthly debt payment $1,500. If your gross monthly income is $5,000, then your DTI ratio is 30%. ($1,500 divided by $5,000 equals 30%.) Visit Experian for more details about calculating your own DTI ratio.

What is a credit utilization ratio?

Your credit utilization ratio compares the amount you’re currently borrowing to how much you could borrow on your credit cards. Essentially, it adds up the balance on each of your credit cards and then compares that number to your total available credit. You can figure out your credit utilization ratio yourself—simply add up the balances on your credit cards, then divide that number by the total of your credit card limits. 

Credit Card Debt ÷ Credit Card Limits = Credit Utilization Ratio

It’s important to note that your credit utilization ratio only looks at revolving credit, which is a loan that gives you revolving access to a set amount of money. Revolving credit typically refers to credit cards and lines of credit, which allow you to borrow money, pay off the balance with interest, and then borrow the money again—all the way up to your maximum amount, as many times as you want, similar to a revolving door. Unlike DTI ratio, credit utilization ratio does not include installment loans, like mortgages and auto loans.

How credit utilization impacts lending

Credit utilization influences your likelihood of being approved for a loan because it directly impacts your credit score. A credit score is a number between 300-850 that tells lenders how likely you are to pay your loans back on time. This number is generally based on five main factors, ranked here by their order of importance:

  1. Payment history (35%)
  2. Credit utilization (30%)
  3. Credit history length (15%)
  4. Types of credit (10%)
  5. New credit (10%)

As you can see, credit utilization accounts for 30% of your credit score. A higher credit utilization ratio means that you’re closer to maxing out your credit cards and you probably have higher monthly payments to make, which isn’t appealing to lenders who want to ensure you can pay back any credit they extend to you. A high credit utilization ratio results in a lower credit score.

The only factor more important than credit utilization for your credit score is payment history (35%), which shows lenders whether you have historically made your payments on time. Be sure to carefully monitor each credit account to ensure your payments are received in a timely manner.

How DTI ratios impact lending

Similarly, lenders may also look at your debt-to-income ratio when considering you as a candidate for a loan. Income is not a factor in determining credit scores, so your credit score is not directly impacted by your DTI ratio. Most credit applications, however, ask for your income so the lender can calculate your DTI ratio and use it as a deciding factor about your creditworthiness. 

This can be particularly important when it comes to your mortgage. A mortgage is the type of loan used when you purchase property, in which the home is used as collateral in the event that you stop making payments to the lender. Property is a large purchase—and mortgage companies want to know that you’re making a financial agreement you’ll be able to keep. If your DTI ratio is too high, you could be denied a home loan or faced with a higher interest rate. 

Together, the DTI ratio and credit utilization ratio provide a more complete picture of your financial health and how likely you are to repay a potential loan.

What’s considered good?

At this point, you’ve probably done the math on your DTI ratio and credit utilization ratio—and now, you want to know if those numbers are good. In terms of credit utilization, a ratio 30% or below is considered desirable, with an excellent ratio being 10% or lower. With statistics like this, it makes sense to wonder, would it be even better to have a 0% credit utilization rate? It can also be important to show lenders that you have the ability to use your credit and pay it off in a timely manner, meaning that surprisingly—the answer might be no.

In terms of debt-to-income, 36% or less is an advantageous ratio that shows that your debt is manageable and you can likely afford payments toward a new loan. The higher your DTI ratio climbs, the less favorable it is considered, with 40% being a sign of financial stress according to the Federal Reserve. Generally, 43% is the highest DTI ratio a borrower can have and be qualified for a mortgage, and at 50% or above, your ratio is almost sure to negatively impact your borrowing options. If you find that your DTI ratio falls into this unfavorable range, it may be time to talk to your lenders about options for paying down your debts. Topics you should discuss include debt consolidation, credit counseling, debt settlement, and bankruptcy.

Improving your ratios

Improving your credit utilization ratio is simple: You can either reduce your credit card balances or increase your credit limit. When you pay as much as possible towards your credit card debt and maintain a lower balance, your ratio will lessen along with your balance. If you have the funds to make a large payment or eliminate the debt right away, then you won’t have to wait long for your credit utilization ratio to improve. If you can’t pay your balance right away, then making small payments and avoiding making new purchases on your credit card(s) will have the same effect over time. 

The other option is to request a credit limit increase from your lender. Increasing the limit would cause you to be further from maxing out your credit card, and would lower your credit utilization ratio. The downside to this option is that your lender may not approve an increase, particularly if you are already struggling with a high credit utilization ratio. Opening a new credit card would also technically have a similar effect on your overall credit limit, but the hard pull on your credit can cause your credit score to dip, making it counterproductive. Increasing a limit on an existing credit account won’t trigger a hard credit check.

Similarly, you can improve your DTI ratio by either reducing your monthly debt payments or increasing your monthly gross income. This can be achieved by paying off credit cards and other loans to lower your total debt, or by improving your income with a new job or a raise. Try creating a budget if you don’t already have one, where you can track your recurring monthly bills and expenses, then plan what to do with the remaining funds. This is also a great way to discover where your spending can be reduced and reallocated towards debt repayment.

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