Understanding Your Debt-to-Income Ratio

Your debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly income. This includes all debt obligations such as mortgage or rent, car loans, student loans, credit card minimum payments, and any other recurring debt payments.

For example, if you earn $5,000 per month and pay $1,500 toward debts, your DTI ratio is 30% ($1,500 ÷ $5,000).

Lenders typically look for a DTI ratio below 36%, with no more than 28% going toward housing costs. A ratio above 43% is generally considered high risk.

1. Calculate Your Current DTI: List all monthly debt payments and divide by your gross monthly income.
2. Prioritize High-Interest Debt: Focus on paying down credit cards and loans with the highest interest rates first,
3. Consider the Debt Avalanche Method: Pay minimum on all debts, then put extra money toward the highest interest rate debt.
4. Increase Your Income: Look for opportunities to earn more through raises, side hustles, or freelance work.
5. Reduce Your Expenses: Create a detailed budget to identify areas where you can cut spending and redirect that money
6. Avoid New Debt: Stop using credit cards and taking on new loans while you work to improve your DTI ratio.
7. Consider Debt Consolidation: If you have multiple high-interest debts, consolidating them into a single lower-interest
8. Negotiate with Creditors: Contact your creditors to discuss lower interest rates or payment plans.

• Only Making Minimum Payments: This extends your debt payoff timeline significantly and costs more in interest.

• Ignoring the Problem: Hoping debt will go away on its own only makes it worse as interest compounds.

• Taking on New Debt: Using credit cards or loans while trying to reduce DTI defeats your progress.

• Not Having a Budget: Without tracking spending, it's hard to find extra money for debt payments.

• Closing Credit Cards After Paying Them Off: This can hurt your credit score by reducing available credit.

• Focusing Only on Small Balances: While psychologically satisfying, ignoring high-interest debt costs you more money.

• Dipping into Retirement Savings: Early withdrawals come with penalties and taxes, and hurt your long-term financial security.

• Not Building an Emergency Fund: Without savings, unexpected expenses force you back into debt.