What Is a Good Debt-To-Income Ratio?

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A Debt-To-Income Ratio (DTI) is a simple metric used to gauge an individual’s financial health. It’s a way to measure how much of your income is eaten up by debt payments each month.

Understanding your DTI is crucial as it helps in making informed financial decisions, be it buying a home, managing your budget, or planning your financial future. Here’s what you should know about DTI and what is considered healthy.

Understanding Debt-To-Income Ratio

Your DTI is calculated by dividing your monthly debt payments by your gross monthly income. The result is a percentage that shows how much of your income goes toward paying off debts each month. For example, if you earn $5,000 a month and have debt payments of $2,000 a month, your DTI is 40%. This ratio encompasses various debts like credit card payments, mortgages, student loans, and other personal loans.

The Importance of a Good DTI

A good DTI is essential for a variety of reasons. It’s a key indicator lenders look at when deciding whether to approve your loan or mortgage application. A lower DTI demonstrates you have a good balance between debt and income, making you a less risky borrower in the eyes of lenders. Moreover, a lower DTI can also mean lower interest rates, saving you money in the long run.

What is Considered a Good DTI?

A good DTI is often considered to be 36% or lower, though the ideal figure can vary depending on the lender and the type of loan. Here’s a simple breakdown:

  • 35% or less: Generally seen as favorable by lenders.
  • 36% to 49%: Manageable, but you may want to work on reducing your debt.
  • 50% or higher: Red flag to lenders, signaling financial stress.
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Ways to Improve Your DTI

Improving your DTI is all about either increasing your income or decreasing your debt – or both. Here are some steps you can take:

  • Budget. Create a budget to track your spending and find areas where you can cut back.
  • Pay down debt. Focus on paying down high-interest debts first to reduce your monthly obligations.
  • Increase income. Look for opportunities to increase your income, such as a side hustle or asking for a raise.
  • Refinance. Consider refinancing high-interest loans to lower your monthly payments.

The Takeaway

A good debt-to-income ratio is a cornerstone of financial health. Understanding your DTI, and working to improve it if necessary, can open doors to better loan terms and a more secure financial future. It’s a simple yet powerful number that every individual should be familiar with in their personal financial journey.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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