Does my debt-to-income (DTI) ratio affect my credit score?

By Jean Folger AAA
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. 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 ...
  2. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  3. How does my debt-to-income (DTI) ratio affect my ability to get a mortgage?

    Find out how much your debt-to-income ratio affects your ability to get a good mortgage rate when buying a home.
  4. 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 ...
RELATED TERMS
  1. Gray Charges

    Fees consumers pay via credit card or debit card for unwanted ...
  2. Billing Cycle

    The interval of time during which bills are prepared for goods ...
  3. Insurance Company Credit Rating

    The opinion of an independent agency regarding the financial ...
  4. Corporate Credit Rating

    The opinion of an independent agency regarding the likelihood ...
  5. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
comments powered by Disqus
Related Articles
  1. 5 Keys To Unlocking A Better Credit ...
    Credit & Loans

    5 Keys To Unlocking A Better Credit ...

  2. How Much Debt Can You Handle?
    Budgeting

    How Much Debt Can You Handle?

  3. How A Bad Roommate Can Ruin Your Credit ...
    Personal Finance

    How A Bad Roommate Can Ruin Your Credit ...

  4. Negotiating A Debt Settlement
    Budgeting

    Negotiating A Debt Settlement

  5. 5 Signs That You're Living Beyond Your ...
    Budgeting

    5 Signs That You're Living Beyond Your ...

Trading Center