A:

A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your gross income. Lenders use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed. It is calculated by dividing your total recurring monthly debt by your gross monthly income.

A credit score, on the other hand, is a numeric expression that helps lenders estimate the risk of extending credit or loaning money to people. The most common credit score is the FICO score, a measurement based on five factors that affect the credit score:

  • Payment history - 35%
  • How much you owe and how much credit you use - 30%
  • Length of your credit history - 15%
  • New lines of credit - 10%
  • Other factors - 10%

Your debt-to-income ratio does not directly affect your credit score. This is because the credit agencies do not know how much money you earn, so they are not able to make the calculation. The credit agencies do, however, look at your debt-to-credit ratio. This compares your credit card balances to the total amount of credit you have available. It is calculated by dividing your credit card balance(s) by your credit limit(s). For example, if you have credit card balances totaling $4,000 with a credit limit of $10,000, your debt-to-credit ratio would be 40% ($4,000 / $10,000 = 0.40, or 40%). In general, the more a person owes relative to their credit limit, the lower their credit score will be. This is because you are seen as more of a risk if you're already maxing out your lines of credit.

Both your debt-to-income and debt-to-credit ratios are used to determine if you qualify for a mortgage, but only the debt-to-credit ratio has any effect on your credit score.

RELATED FAQS
  1. What is the formula for calculating the debt-to-equity ratio?

    Expressed as a percentage, the debt-to-equity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >>
  2. How do I lower my debt-to-income (DTI) ratio?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders ... Read Full Answer >>
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your gross income. Lenders ... Read Full Answer >>
  4. How does my debt-to-income (DTI) ratio affect my ability to get a mortgage?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, ... Read Full Answer >>
  5. What's considered to be a good debt-to-income (DTI) ratio?

    A debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. ... Read Full Answer >>
  6. Can a debt collector contact me about a debt that's no longer on my credit report?

    According to Experian, a debt collector is permitted to contact a consumer about a debt that is no longer on the consumer's ... Read Full Answer >>
Related Articles
  1. Entrepreneurship

    The 5 Best Ways To Make Money with a Podcast

    Learn about the best and easiest methods podcasters utilize to turn their podcasts into revenue streams or sources of secondary income.
  2. Home & Auto

    Don't Be the Victim of Auto Loan Rip-Offs

    Subprime auto loans – and 60-day delinquencies – are up. These 4 signs of predatory auto loans can tip you off before you're caught in one.
  3. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  4. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  5. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  6. Credit & Loans

    Top 5 Reasons Why People Go Bankrupt

    The biggest cause of bankruptcy in the United States is medical expenses.
  7. Home & Auto

    What to Do When You Can No Longer Afford Your Car

    Life is full of unexpected and undesired events, like layoffs or divorce. Unfortunately, these events can sometimes make your car payment unaffordable.
  8. Insurance

    Cashing In Your Life Insurance

    In tough economic times, tapping into a life insurance policy can provide a needed source of funds.
  9. Retirement

    7 Ways to Use a Strong Credit Score During Retirement

    Find out why it is important to maintain a good credit in retirement. Learn seven reasons not to leave your credit score behind when you retire.
  10. Retirement

    6 Methods to Maintain a Healthy Credit Score During Retirement

    Learn how to improve your credit score during retirement. Your credit score still matters in retirement, and these tips can give it a boost.
RELATED TERMS
  1. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  2. Credit Report

    A detailed report of an individual's credit history prepared ...
  3. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  4. Credit Union

    Member-owned financial co-operative. These institutions are created ...
  5. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  6. Personal Property Securities Register (PPSR)

    A written, public, online record of legal claims to personal ...
Trading Center