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. ### Will having several credit cards hurt my credit score?

The manner in which you use your credit cards may affect your credit score more than the number of credit cards you own will. Read Answer >>
2. ### What are the biggest factors that can affect my credit score?

A credit score is a numeric expression that helps lenders estimate the risk of extending credit or loaning money to people. ... Read Answer >>
3. ### What's considered to be a good debt-to-income (DTI) ratio?

Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and whether ... Read Answer >>
Related Articles
1. Personal Finance

### Why Too Many Credit Cards Can Hurt Your Credit Score

Find out why having too many credit card accounts can adversely impact your credit score if the cards are not managed properly.
2. Personal Finance

### Credit Repair: How to Improve Your Credit Score

There is no quick fix for a bad credit score, but there are several strategies you can take to improve your credit rating and save money over the long term.
3. Personal Finance

### The Importance Of Your Credit Rating

A great starting point for learning what a credit score is, how it is calculated and why it is so important.
4. Personal Finance

### Should Your Credit Rating Scare You?

Take the mystery out of credit scores by learning the most important ways it can impact your life.
5. Personal Finance

### The 5 Biggest Factors That Affect Your Credit

Credit companies rely on these factors to determine whether to lend to you and at what rate.
6. Personal Finance

### Is Your Credit Score at 850? It Can Be!

Use these tips to increase your credit score and your ability to get low interest rates on loans.
7. Investing

### Millennials: Prevent a Bad Credit Score

Here are five ways to help prevent getting a bad credit score that could affect future loan, credit card or mortgage approvals.
8. Personal Finance

### Take the Right Steps to Build Excellent Credit

There are several things you can do to protect and improve your credit score.
9. Personal Finance

### 6 Benefits of Increasing Your Credit Limit

If you can resist the urge to overspend, then raising your credit limit could benefit you in various ways.
10. Personal Finance

### Credit Scores And Your Mortgage Payment: It Matters

Your credit score can have a huge impact on your mortgage payments. Here are some reasons why.
RELATED TERMS
1. ### Credit Utilization Ratio

An input used in determining a person's credit score. It is the ...
2. ### FICO Score

A type of credit score that makes up a substantial portion of ...
3. ### Bad Credit

A qualification of an individual's credit history that indicates ...
4. ### Credit Score

A statistically derived numeric expression of a person's creditworthiness ...
5. ### Credit Limit

The amount of credit that a financial institution extends to ...
6. ### Balance-To-Limit Ratio

The amount of money you owe on your credit cards compared to ...
Hot Definitions
1. ### Current Assets

A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
2. ### Tax Liability

The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
3. ### Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
4. ### Net Profit Margin

Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
5. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
6. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
Trading Center