Debt-to-Income Ratio | Cambridge Credit (2024)

Debt-to-Income Ratio | Cambridge Credit (1)

A widely used measure for gauging financial stability is called a debt-to-income ratio. Because it is such a powerful indicator, lenders look at this ratio when they consider extending credit. A high debt-to-income ratio jeopardizes chances of making major purchases, such as a car or a home. Maintaining a low debt-to-income ratio, along with a good credit history, will help you to qualify for the lowest interest rates and best terms.

How to Calculate Your Debt-to-Income Ratio

The debt-to-income ratio is represented as a percentage. There are two methods of determining debt-to-income ratios. The first method is to compare net monthly income vs. debt. The second, and more widely used method, compares gross monthly income vs. debt. For the purposes of this section we will be referencing the second method.

The first step in calculating your debt-to-income ratio is to assess your gross (before taxes) monthly income. Some people have additional income besides their pay.

Some examples of additional income are:

  • Regular income from alimony and child support.
  • Bonuses, commissions and tips (approximate values.)
  • Dividends and interest earnings.
  • Government benefits and/or assistance.

Next, list the current minimum payments on all credit cards and loans (except mortgage).

Be sure to include:

  • Car payments
  • Installment loan payments
  • Bank/credit union loans
  • Student loan payments
  • Credit lines

Debt-to-Income Ratio is calculated as the total debt payments divided by the gross monthly income. For example:

  • Total debt payments = $700
  • Gross monthly income = $3,200
  • Debt-to-Income Ratio= $700 / $3,200 = 22%

What Is An Acceptabel Debt-to-Income Ratio?

Generally, the lower a debt-to-income ratio is, the better your financial condition. Following are examples of the different percentages. Note: This example assumes a loan applicant's FICO score is above 700.

  • 10% or less: Shouldn't have trouble getting loans. May qualify for lower rates.
  • 11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending.
  • 21% to 35%: Although you may not have trouble getting new credit cards, you are spending too much of your monthly income on debt repayment.
  • 36% to 50%: You may still qualify for certain loans, however it will be at higher rates. It is time to develop a plan to get out of debt.
  • More than 50%: Very difficult to qualify for financing.
  • Note: All answers are providing the consumers FICO score is above 700.

You can avoid going into debt by staying aware of your debt-to-income ratio. Knowing your debt-to-income ratio will help you to make sound decisions about making purchases on credit or taking out loans.

Debt-to-Income Ratio | Cambridge Credit (2024)


Debt-to-Income Ratio | Cambridge Credit? ›

11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending. 21% to 35%: Although you may not have trouble getting new credit cards, you are spending too much of your monthly income on debt repayment. 36% to 50%: You may still qualify for certain loans, however it will be at higher rates.

What is a good debt-to-income ratio for credit? ›

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

What do experts say the debt-to-income ratio should be below? ›

Most lenders see DTI ratios of 36% as ideal. Approval with a ratio above 50% is tough. The lower the DTI the better, not just for loan approval but for a better interest rate.

What is the 28/36 rule? ›

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

What is a bad debt-to-income ratio? ›

Key takeaways. Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

What does the average American have credit score wise? ›

In the U.S., the average credit score is 716, per Experian's latest data from the second quarter of 2023. And when you break down the average credit score by age, the typical American is hovering near or above that score.

How to fix debt-to-income ratio? ›

Practical Tips and Tricks to Lower Your Debt-to-Income Ratio
  1. Pay Down Debt. Paying down debt is the most straightforward way to reduce your DTI. ...
  2. Consolidate Debt. Debt consolidation is the process of combining multiple monthly bills into a single payment. ...
  3. Lower Your Interest on Debt. ...
  4. Increase Your Income.
Jan 4, 2023

How much house can I afford if I make $70,000 a year? ›

The home price you can afford depends on your specific financial situation—your down payment, existing debts, and mortgage rate all play a role. Most experts recommend spending 25% to 36% of your gross monthly income on housing. For a $70,000 salary, that's a mortgage payment between roughly $1,450 and $2,100.

How much money do you have to make to afford a $300 000 house? ›

How much do I need to make to buy a $300K house? You'll likely need to make about $75,000 a year to buy a $300K house. This is an estimate, but, as a rule of thumb, with a 3 percent down payment on a conventional 30-year mortgage at 7 percent, your monthly mortgage payment will be around $2,250.

How much house can I afford if I make $135000 a year? ›

Applying the 28/36 rule, a $130,000 annual earner should keep housing costs below $3,033. However, there are many other factors besides just your income that shape how much house you can comfortably afford. Credit score: A strong credit score is important when you apply for a home loan.

What profession has the worst debt-to-income ratio? ›

Debt-to-income ratios for physicians ranged from 89% to 95% during the study period. The profession with the second lowest debt-to-income ratios was pharmacy, with ratios ranging from 107% to 141%. Ratios were highest for veterinarians throughout the entire study period, remaining above 160% from 2011 onward.

What is the average debt-to-income ratio in America? ›

The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the fourth quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.

How much debt does the average American have? ›

The average debt an American owes is $104,215 across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans. Data from Experian breaks down the average debt a consumer holds based on type, age, credit score, and state.

Is a 27% debt-to-income ratio good? ›

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

What should your income to credit card debt ratio be? ›

35% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills. 36% to 49% means your DTI ratio is adequate, but you have room for improvement. Lenders might ask for other eligibility requirements.

Is a 20% debt-to-income ratio bad? ›

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

Is 40% debt-to-income ratio bad? ›

Wells Fargo, for instance, classifies DTI of 35% or lower as “manageable,” since you “most likely have money left over for saving or spending after you've paid your bills.” 36% to 43%: You may be managing your debt adequately, but you're at risk of coming up short if your financial situation changes.

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