Debt-to-income ratio: how to calculate it and what is safe
Before lending you anything, a bank looks at one number: how much of your income already goes to debt payments. It is worth knowing it yourself.
In short
Your debt-to-income ratio is the total of your monthly payments on loans, cards and other debts, divided by your monthly income and multiplied by one hundred. Payments of 1 200 on an income of 4 000, for example, are 30 percent. As a rough guide: up to thirty percent is manageable, thirty to fifty is tight and any surprise hurts, and above fifty is dangerous — take on no new debt and pay down what you have first.
Lenders call it DTI and calculate it before every loan, often with their own thresholds. But the idea is useful for any budget: out of every hundred you earn, how much is already promised to someone else.
How to work it out
Payments
Every monthly debt payment
Loans, mortgage, cards, buy now pay later
Income
Monthly average
The money that actually arrives
Payments ÷ income × 100
The formula
The result is a percentage
Example: mortgage 900, phone on instalments 60, credit card minimum 240. That is 1 200 a month. Income: 4 000. Debt-to-income: 1 200 ÷ 4 000 × 100 = 30 percent.
A lender may use your income before tax. For your own budget, the money that actually reaches your account is the more honest base.
What level is healthy
Up to 30%
Manageable
Room left to live and save
30–50%
Tight
One breakdown and the card comes out
Over 50%
Dangerous
No new debt, pay down what you have
These are guides, not a law. Thirty percent on an income of 8 000 and on one of 1 500 are different situations: in the second, what is left for food and housing may not be enough even when the ratio looks "normal".
What people forget to count
Interest-free instalments are debt too: there is a payment every month even without interest. How to handle them: interest-free instalments. Money borrowed from family counts too, even if nobody reminds you. And the credit card minimum is not the whole debt, only what stops it growing faster.
If you are above fifty percent
- Take on no new debt, including small instalment plans.
- List every debt with its rate and choose an order: by rate or by size. Both methods are in how to get out of debt.
- Give every debt a payoff date: a plan with dates.
- Send unexpected money — a bonus, a tax refund — to the most expensive debt. Whether to shorten the term or lower the payment when you pay extra: paying extra on a loan.
Why check it before borrowing
Every new payment raises the ratio, and your income does not rise with it. Before buying on credit, work out the ratio with the new payment included. If it goes past thirty or forty percent, it may be worth saving at least part of the amount: how much to save each month for a big purchase.
What it looks like in the app
In Caudal's Debts section, a debt with a payment plan has its monthly payment and the day of the month. Those payments are counted in the "how many days your money lasts" forecast on the main screen, on a line of their own, and the app warns you if spending plus debt payments exceed your income. The total of your debt payments is right there: divide it by your income and you have your debt-to-income ratio.
Common questions
- How do I calculate my debt-to-income ratio?
- Add up all your monthly payments on loans, mortgage, credit cards, instalment plans and other debts, divide by your average monthly income and multiply by one hundred. Payments of 900 on an income of 3 000 are 30 percent.
- What is a good debt-to-income ratio?
- A common guide is up to thirty percent of income. Between thirty and fifty the budget becomes vulnerable to any surprise. Above fifty percent is a dangerous level at which taking on more credit is not a good idea.
- Do buy now, pay later plans count in debt-to-income?
- Yes. Even without interest, each one has a monthly payment that comes out of your income, so it belongs in the calculation like any other loan.
Try it on your own money
Caudal is an expense tracker in Spanish, English and Russian. Several currencies, goals, debts, a shared household budget. Recording an expense takes three seconds.
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