What's a Good Debt-to-Income Ratio? How to Improve DTI

Your debt-to-income ratio compares how much you owe each month in loan payments and other debt obligations with how much you earn. It's a key measure, expressed as a percentage, that lenders use to assess a borrower's ability to manage monthly payments and repay debt. A lower ratio generally signals stronger financial health, while a higher ratio can be a red flag.

DTI is calculated using this formula:

Include recurring obligations like your housing costs, credit card minimums, auto loans, student loans, and personal loans. It's also a good idea to include the estimated payment for any new debt you're applying for.

Use your total monthly gross income before taxes or deductions. Be sure to include not only your salary but also bonuses, commissions, and any income from property, investments, alimony, and child support.

Divide your total debt payments by your gross monthly income. Then multiply by 100 to calculate your DTI percentage.

Not every monthly expense is included when calculating your debt-to-income ratio. DTI focuses specifically on required debt obligations—payments that lenders expect you to make regularly under the terms of a loan or credit agreement.

Common obligations that typically count toward DTI include:

• Mortgage payments (including property taxes and homeowners insurance) or rent
• Credit card minimum payments
• Car payments
• Student loan payments
• Personal loans
• Alimony or child support

Some regular expenses usually do not count toward DTI because they aren't debt obligations. These often include:

• Utilities
• Groceries
• Insurance premiums not tied to a loan
• Cell phone bills
• Subscriptions or other discretionary spending

Understanding the difference can help you calculate your ratio more accurately and see which financial obligations are most likely to affect your borrowing capacity.

Lenders consider DTI when deciding whether to approve loans or credit. A lower DTI ratio shows you're using a manageable portion of your income for debt, which can improve your creditworthiness and credit history, enhancing borrowing options.

Beyond borrowing decisions, tracking your DTI can also help you understand how much of your income is already committed to debt. Even as income increases, finances can still feel stretched if a significant share of monthly earnings goes toward required payments.

Generally, lenders prefer to see a DTI under 36%. Here's a breakdown.

Fortunately, there are steps you can take to improve your DTI. Even if you're not currently applying for a new loan, taking these steps now is a smart move for managing your money and staying on top of credit and debt—a key aspect of personal finance.

Come up with a realistic plan to pay down your existing debt. One way is to arrange your debt by interest rate. Focus on the highest interest rate balance first while continuing to pay at least the minimum on the others. Work your way down the list.

Don't take on new debt unless it's absolutely necessary. If you can delay making major purchases and reduce your credit card use—even for a few months before applying for a loan—it could help improve your ratio.

Can you negotiate a raise? Take on a side hustle? Also think about passive income ideas like rental income. You don't have to own a separate property. You could consider renting out a room in your place—or even a parking space—to improve the denominator in your DTI calculation.

Consider a debt consolidation plan where you combine multiple payments into one. It might lower your interest rate as well as your monthly payment. Could you refinance to extend terms and reduce your payment? Some credit card companies may be willing to reduce your interest rate if you simply ask. These steps can lower your monthly obligations and improve your DTI, though extending loan terms may increase total interest over time.

Improving DTI isn't something you can set and forget. It's a target to aim for, plan how to achieve, and then keep on top of. Once you set your DTI-lowering plan in motion, check in on your progress periodically to stay on track. DTI is especially important when you are starting to consider financing a purchase.

Your debt-to-income ratio is more than just a number lenders check during an application. It's a measure of your own financial health and borrowing power. A lower DTI doesn't just help you qualify for credit; it can directly influence how much you're approved to borrow and whether you're offered lower interest rates. When lenders see that you have manageable monthly obligations, they're more likely to view you as a lower risk borrower.

That can translate into meaningful advantages, including lower interest costs on mortgage loans or auto loans, more flexibility around down payment requirements, and monthly payments that fit more comfortably into your budget. A healthier DTI can also support better credit utilization by freeing up cash flow, which further strengthens your financial profile.