You may earn $48,000 a year and feel behind, but if you’ve paid off unsecured debts, that income can be far stronger than a six‑figure salary weighed down by a high debt-to-income ratio.
A debt-to-income (DTI) ratio compares your monthly debt obligations with your gross monthly income. Lenders use this percentage to judge how likely you are to repay new credit. Below we explain how to calculate your DTI, how to interpret it, and whether it affects your credit score.
This guide covers the essentials of DTI ratios and why the number matters for your finances.
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What is a debt-to-income ratio?
A debt-to-income (DTI) ratio measures the share of your pre-tax income that goes toward monthly debt payments. In simple terms, it shows how many cents of every dollar earned are used to pay debts.
A low DTI generally indicates manageable monthly obligations and better ability to afford new credit. A high DTI can signal financial stress and difficulty meeting payments.
How to calculate debt-to-income ratio
You can calculate your DTI in a few straightforward steps—no accountant required.
-
Add up your monthly fixed debt payments. Include the regular, recurring amounts you pay each month, such as:
• Mortgage
• Rent
• Car loan payments
• Minimum credit card payments
• Student loan payments
• Child support
• Other loan payments (furniture, appliances, etc.)
Example: your monthly debt payments total $2,500.
- Divide that total by your gross monthly income (income before taxes and deductions). For example, if your gross monthly income is $4,000:
$2,500 ÷ $4,000 = 0.625
- Convert the decimal into a percentage by multiplying by 100.
0.625 × 100 = 62.5%
So in this example your DTI is 62.5% — meaning about $0.63 of every dollar earned goes toward monthly debt obligations.
What is a good debt-to-income ratio?
Whether a DTI is “good” depends on context. A 62.5% ratio is high for most lenders, even though it may compare favorably to some national averages. Lenders and credit counsellors use different benchmarks.
Credit Canada suggests these general guidelines:
| Debt-to-income ratio | Rating |
|---|---|
| <34% | Good |
| 35% to 45% | OK |
| 46% and up | Not great |
These categories help you understand how lenders might view your application and where you stand financially.
What DTI means for your finances and why it matters
Your DTI affects both your borrowing options and your overall financial health:
It influences your borrowing potential
Lenders are hesitant to approve credit for borrowers whose monthly obligations are already high. Many Canadian lenders prefer applicants with a DTI no higher than roughly 42%, though standards vary by institution and loan type.
It provides a snapshot of your financial position
The DTI ratio is a simple, useful indicator that helps you see whether debt levels are balanced against income. It’s a practical tool for budgeting and planning debt repayment.
Does debt-to-income ratio affect your credit score?
DTI itself does not directly affect your credit score, according to credit reporting agencies like Equifax. However, lenders review your DTI alongside your credit score when making lending decisions.
One ratio that does affect your credit score is your credit utilization ratio—the amount of available revolving credit you’re using. That percentage can influence your credit score because it reflects how heavily you rely on available credit.
Limitations of the DTI ratio
DTI is a blunt tool that doesn’t distinguish between types of debt. For example, a high DTI driven by a mortgage may be less risky than the same DTI caused by large credit card balances. The ratio also doesn’t account for interest rates: two borrowers with identical monthly payments could face very different long-term costs depending on whether their debt carries high or low interest.
Because of these limitations, lenders consider multiple factors—credit history, income stability, assets, and credit utilization—when evaluating credit applications.
Lower your DTI ratio with credit counselling
Knowing your DTI gives you a clear starting point for improving your finances. If your ratio is high, there are options to reduce it and improve your eligibility for credit.
Credit counselling services can help you build a realistic budget, prioritize high-interest debt, and develop a repayment plan. Speaking with a certified counsellor can also reveal options such as consolidation or negotiated repayment arrangements to reduce monthly obligations and lower your DTI.
Talk to one of Credit Canada’s certified credit counsellors to review your budget and credit report, and to develop a plan to stop collection calls and rebuild financial stability.
This article was written by Mike Bergeron, a certified Credit Counsellor and Financial Coach with Credit Canada. With more than 15 years in the financial industry, he has assisted thousands of clients with debt consolidation, budgeting, and recovery from financial setbacks.
Credit Canada is the country’s first and longest-standing credit counselling agency. For over 50 years, the non-profit has provided education and debt resolution services to help Canadians reach financial wellness and achieve their goals.
If you are struggling with debt, you can contact Credit Canada for free credit counselling services.
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