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 are the best ways to rebuild my credit score quickly?

    Repair your credit score more quickly by talking to your lender, increasing the credit limit on your existing credit cards ... Read Answer >>
  4. Is it possible to have a credit limit that's too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  5. Will credit card inactivity affect my credit score?

    Whether your credit score will be affected by inactivity depends on how you define "inactivity". Your credit report does ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Personal Finance

    How Bad Is My Credit Score?

    You've seen the number, but what does it mean? Here's how to assess your credit score and get to a better place if needed.
  8. 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.
  9. Personal Finance

    Do You Understand Your Credit Score?

    Most Americans don't really understand their credit scores. Find out what you need to know.
  10. Personal Finance

    5 Ways to Up Your Chance of Getting a Mortgage

    Tips and ways to improve your chances of getting a mortgage.
RELATED TERMS
  1. Credit Utilization Ratio

    An input used in determining a person's credit score. It is the ...
  2. Credit Mix

    The types of accounts that make up a consumer’s credit report. ...
  3. Good Credit

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

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

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

    A statistically derived numeric expression of a person's creditworthiness ...
Hot Definitions
  1. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  2. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  3. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  4. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  5. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  6. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
Trading Center