Your debt-to-income (DTI) ratio is a key number that shows how much of your income goes toward paying off debt. Whether you’re applying for a loan, trying to get on top of your finances, or just want to improve your financial health, understanding your DTI ratio is a great place to start.
Let’s break it down.
What is debt-to-income ratio?
Your DTI ratio is the percentage of your monthly income that goes towards paying off debts.
How it’s calculated:
- Add up your monthly debt payments (eg loans, credit cards, mortgages)
- Divide that total by your gross monthly income (what you earn before tax)
- Multiply by 100 to get a percentage
Example:
- Monthly debt payments: £1000
- Gross monthly income: £3000
- DTI ratio = (£1000 ÷ £3000) x 100 = 33%
This means 33% of your income goes toward paying off debt.
What does your DTI ratio mean?
20% or less
A low DTI ratio – lenders see you as financially stable.
21%–35%
Generally acceptable – most lenders consider this manageable.
36% or more
Higher risk – lenders may hesitate to approve loans or may charge higher interest rates.
Why does your debt-to-income ratio matter?
1. It affects loan approvals
Lenders check your DTI to decide if you can handle more debt. A lower ratio makes it easier to get approved for loans, mortgages, or credit cards.
2. It impacts interest rates
A lower DTI can help you get better interest rates, meaning you pay less over time.
3. It reflects your financial health
A high DTI can mean you’re stretched too thin, making it harder to save or cover unexpected costs. It can also lead to financial stress.
How to improve your debt-to-income ratio
If your DTI ratio is higher than you’d like, don’t worry – here are some simple ways to improve it:
1. Reduce debt
Pay off high-interest debts first
Credit cards and payday loans cost more in interest, so tackle them first.
Create a repayment plan
List your debts and set a timeline to pay them off.
2. Increase your income
Ask for a raise
If you’re performing well at work, a salary review could help.
Find a side hustle
A part-time job or freelance work can bring in extra income.
Sell things you don’t need
Declutter and make some quick cash.
3. Refinance or consolidate debt
Look into refinancing
A lower interest rate could reduce your monthly payments.
Consider debt consolidation
Rolling multiple debts into one can make repayments simpler and more manageable.
4. Budget smarter
Track your spending
Use an app or spreadsheet to see where your money’s going.
Cut unnecessary expenses
Small savings add up over time.
Set financial goals
Whether it’s clearing a credit card or saving for a big purchase, having a goal can keep you motivated.
Take control of your DTI
Your debt-to-income ratio is a great tool for understanding and improving your financial health. By reducing debt, increasing income and sticking to a realistic budget, you can lower your DTI ratio and open the door to better financial opportunities. Go you.
Remember, every little step makes a difference. Get in control of your DTI ratio today and set yourself up for a better financial future.