A Simple Step-by-Step Guide for Beginners
Ever feel like your finances are “okay” but something just doesn’t add up? You make decent money, your bills are paid (most of the time), but when it comes time to apply for a car loan, mortgage, or credit card… you’re getting denied or stuck with high interest rates. Sound familiar?
Here’s the truth: lenders don’t just look at your income or credit score—they look at your Debt-to-Income Ratio, or DTI. And if you’re like most people, no one ever really explained what that means—or how to calculate it.
You might be thinking, “I’m not a numbers person.” Or “That sounds complicated.” But don’t worry—we’re going to break it all the way down, step by step, no jargon, no stress.
In this quick guide, you’ll learn exactly:
- What DTI actually means (and why it matters so much)
- How to calculate your own DTI in less than 5 minutes
- What a “good” DTI looks like—and how to improve it
Let’s dive in.
Step 1: Understand What DTI Is
DTI stands for Debt-to-Income Ratio. It’s a simple way to compare how much debt you’re paying each month versus how much income you’re bringing in. Lenders use it to decide how risky it is to lend you money.
Formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) x 100
Step 2: Add Up Your Monthly Debt Payments
This includes:
- Rent or mortgage
- Auto loans
- Student loans
- Credit card minimum payments
- Personal loans
- Any other recurring debts
💡 Tip: Only include required payments. Don’t count things like groceries, subscriptions, or utilities.
Step 3: Determine Your Gross Monthly Income
Gross income is what you earn before taxes. If you’re salaried, divide your annual salary by 12. If you’re self-employed or hourly, average out a few months to get a reliable number.
Step 4: Plug In the Numbers
Let’s say your monthly debts total $1,800 and your gross income is $5,000.
DTI = ($1,800 ÷ $5,000) x 100 = 36%
Step 5: Interpret Your DTI Score
- Below 36%: Healthy, low-risk range
- 36%–43%: Acceptable for most loans
- Over 43%: Risky—time to reduce debt or increase income
Understanding your DTI isn’t just about qualifying for loans—it’s about taking control of your financial future. When you know your numbers, you know your power. Now that you’ve got this skill down, you’re already one step ahead.