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Why Does Credit Card Debt-to-Income Ratio Matter?

Why Does Credit Card Debt-to-Income Ratio Matter?
Austin Kilham

Austin Kilham

Updated May 6, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Your debt-to-income ratio is a measure of how much debt you’re paying off each month compared to how much income you have coming in each month. It gives creditors a sense of how balanced your budget is and how easy it is for you to meet your monthly debt obligations. Keeping your ratio down makes you a better candidate for both revolving credit (such as credit cards) and non-revolving credit (like loans). If you’re currently in the market for a credit card or a loan, you’ll want to become familiar with your debt-to-income ratio (or DTI). Here’s a closer look at what DTI is and how to manage it. 

Debt-to-Income Ratio for Credit Card Approval

Debt-to-income ratio, or DTI, divides the total of all monthly debt payments by gross monthly income, giving you a percentage. The more income you have compared to debt payments, the lower your DTI, and the more likely you are to be able to service your debts. As the proportion of debt payments to income grows, creditors may worry you’ll fall behind. In fact, one of the most common reasons why people get rejected when applying for a credit card (even those with good credit) is a high DTI. Even if you do get approved for a new card, a high DTI can translate into higher interest rates, stricter terms, and steeper credit card fees.

Calculating Your Debt-to-Income Ratio

To calculate your DTI, first add up all of your monthly debt payments. These include rent or mortgage payments, student loans, auto loans, and monthly minimum credit card payments. Next, determine your monthly gross income (this is how much you earn each month before any taxes or other deductions are subtracted from your paycheck).Finally, divide your total debt payments by your monthly gross income to arrive at your DTI. For example, if your mortgage payments are $1,500 a month, your minimum credit card payment is $200 a month, and your student loan payment is $350 a month, your total monthly debt is $2,050. If your monthly income before taxes is $6,000, then your DTI is $2,050/$6,000, which equals 0.341, or 34%. 

How Lenders View Your Credit Card Debt-to-Income Ratio

A high DTI may not seem like an issue if you’re paying your bills on time and not falling behind. But from a lender’s point of view, a high debt-to-income ratio is a red flag because it suggests that you are living either on or close to the edge. If your DTI is high, for example, a sudden loss of income can push you into crisis pretty quickly. A high DTI can also signal that you are already living beyond your means. While debt payments (like rent/mortgage and transportation/car loan) often represent a person’s biggest expenses, there are still other bills to cover, including food, gas, utilities, clothing, and entertainment. If debt payments leave you little leftover cash each month, you may start putting other expenses on credit cards, which will push your DTI even higher.

Does Credit Card Debt-to-Income Ratio Affect Your Credit Score?

No, your DTI does not affect your credit score. That’s because the credit reporting bureaus — Experian, TransUnion, and Equifax — do not collect income data. They are more interested in your debt history than your income history.However, lenders and credit issuers typically request your income when you submit an application, which (combined with your credit reports) they can use to determine your DTI. Creditors will also look at another important ratio – credit utilization. This is how much of your available credit you are currently using. Credit utilization is part of your credit report and does affect your scores. In fact credit utilization makes up 30% of your score, second in importance only to your payment history. If you’ve never taken on any debt before, you may have no credit history to speak of. If that’s the case, you may want to consider applying for a credit-building credit card.

Understanding Debt-to-Income Ratio for Credit Cards

Keeping your DTI at a reasonable level signals that you're capable of managing your debt responsibly and can improve your eligibility for financial products. A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum DTI at which you're eligible for a Qualified Mortgage, a type of home loan that requires a lender to evaluate a borrower’s ability to pay back what they borrow.

What Is a Good Debt-to-Income Ratio for a Credit Card?

What’s considered a “good” DTI will vary slightly from one lender to another. However, as a general rule, the lower your DTI, the better.

Debt-to-Income Ratio of 36% or Less

Many banks see a DTI of about 36% or less as a safe range for extending loans or new lines of credit. A ratio of this amount suggests that a borrower's monthly income is healthy enough to allow for safe levels of spending and saving, and their debts are unlikely to become unmanageable. 

Debt-to-Income Ratio of 36% to 49%

On the lower end of this range, you may still be managing your debt adequately. However, in the upper levels, you may consider doing what you can to lower your DTI so you can have an easier time qualifying for credit. As your DTI goes into the upper 40s, lenders may be less willing to offer you a loan or credit card, or they may impose additional criteria for eligibility and/or higher rates and fees.  

Debt-to-Income Ratio of 50% or more

If you have a DTI of 50% or more, more than half of your income is going to debt payments, and you may struggle to make your monthly bill payments on time. There certainly isn’t much wiggle room in your budget for unexpected expenses should they crop up. If you’re struggling to make current credit card payments, you may want to consider negotiating your credit card debt.This may not be an ideal time for you to take on more debt. And lenders may require that you either pay off some of your debt or increase your income before they offer your credit. 

What Should I Do if My DTI Is Too High?

If your DTI is too high, there are some steps you can take to improve it. 

Stop Charging 

To start bringing your ratio down, don’t charge anything that isn’t absolutely necessary. Consider using cash or a debit card vs a credit card when possible.

Transfer Your Balance to a Lower-Interest Card 

If possible, you may want to transfer your credit card balance to a card with a lower interest rate. With less money going toward interest payments, you’ll be able to devote more resources to paying down your principal. 

Reduce Spending 

Take a close look at where your money is going each month and look for places where you can cut back. Put any money you free up toward debt repayment.Recommended: 7 Tips to Reduce Credit Card Debt 

Getting a Credit Card for High Debt-to-Income Ratio

If you’re denied a credit card due to a high debt-to-income ratio, your best bet is to work on lowering your ratio by steadily paying off your debt. As you lower your debt, you’ll not only improve your DTI, but will likely also improve your overall credit profile, a combo that can increase your odds of approval for a credit card.In the meantime, there may be other types of cards you may qualify for, including cards for fair credit and cards for bad credit. Another option is to get a secured credit card. This requires putting down a security deposit that the creditor can use to cover your debt if you fail to make payments. 

The Takeaway

Debt-to-income ratio, or DTI, divides the total of all monthly debt payments by your gross monthly income, giving you a percentage. Lenders use DTI — along with credit history — to evaluate whether a borrower can repay a loan. Each lender sets its own DTI requirement, but if you're looking to qualify for a card for good credit, you’ll want your DTI to be 43% or lower.If you’re looking for a new card, Lantern by Sofi makes comparing credit cards easy. Simply browse card options from multiple issuers in our network to find one that meets your needs and qualifications.
Photo credit: iStock/Prostock-StudioThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC0122047

Frequently Asked Questions

What is a good debt-to-income ratio for a credit card?
Do credit cards count in calculating debt-to-income ratio?
Is a 37% debt-to-income ratio good?

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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