Your debt-to-income ratio (DTIR) is the percentage ratio of your annual required debt payments (mortgage or rent, credit card payments, student loans, etc.) divided by your annual gross income (i.e., your income before taxes). The resulting number is one that lenders look at when they consider loan applications.
Most lenders divide DTIR into four different categories:
DTIR = 36% or less
- This is considered the maximum acceptable DTIR. It shows a person can control their spending in relation to their income and will probably be considered a safe loan risk.
DTIR = 37% – 42%
- Lenders consider a DTIR in this range risky. A person in this range needs to improve debt before it gets out of control.
DTIR = 43% – 49%
- This is a dangerously high DTIR; it wouldn’t take much for a person in this range to have a financial crisis.
DTIR = 50% or more
- Legitimate creditors would consider a person with this high a DTIR a poor risk, and would likely be reluctant to give a loan or credit card. If a person did get a loan or line of credit, it would likely be at a very high rate.
So what is your debt-to-income ratio? If you don’t know, you can check out the debt-to-income ratio calculator on Credit.com. It’s good information to know, even if you aren’t planning on applying for a loan or credit card any time soon. Calculating your DTIR might just be the motivation you need to get your debt and finances under control.