Debt-to-income ratio (DTI) is the ratio of total debt payments divided by gross income (before tax) expressed as a percentage. For example, if your monthly income is 2,000 and you spend $1,000 on debt each month, then you DTI ratio is 50%. DTI should not be confused with the credit utilization ratio (sometimes called debt-to-credit ratio) that is often discussed along with DTI and works slightly differently. The debt-to-credit ratio is the percentage of how much a borrower owes compared to their credit limit and has an impact on their credit score; the higher the percentage, the lower the credit score.
DTI is an important indicator about the debt level of a person or a family. Lenders use this ratio to value the risk of lending. Credit card issuers, loan companies, and car dealers can all use DTI to assess their risk of doing business with different people. A person with a high ratio is seen by lenders as someone that might not be able to repay what they owe. Different lenders have different standards for what an acceptable DTI is; a credit card issuer might view a person with a 45% ratio as acceptable and issue them a credit card, but someone who provides personal loans may view it as too high and not extend an offer. It is just one indicator used by lenders to assess the risk of each borrower to determine whether to extend an offer or not, and if so the characteristics of the loan. Theoretically, the lower the ratio, the better.There are two main types of DTI Ratio: