Is a 20% debt-to-income ratio bad?
35% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills. 36% to 49% means your DTI ratio is adequate, but you have room for improvement. Lenders might ask for other eligibility requirements.
Generally, a DTI of 20% or less is considered low and at or below 43% is the rule of thumb for getting a qualified mortgage, according to the CFPB. Lenders for personal loans tend to be more lenient with DTI than mortgage lenders. In all cases, however, the lower your DTI, the better.
A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Debt-to-income ratio of 36% or less
With a DTI ratio of 36% or less, you probably have a healthy amount of income each month to put towards investments or savings. Most lenders will see you as a safe bet to afford monthly payments for a new loan or line of credit.
If your DTI is 35% or less, you're doing well. Your repayments are manageable, and you may have room for another financial obligation. If you have a DTI ratio between 36% and 49%, you're not doing too badly—but you have room to improve.
$20,000 is a lot of credit card debt and it sounds like you're having trouble making progress,” says Rossman.
Debt is part of the average American's life, and you can start to accumulate it as young as your 20s.
The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the second quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.
Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.
Is rent included in debt-to-income ratio?
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.
Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
Most lenders see DTI ratios of 36% or less as ideal. It is very hard to get a loan with a DTI ratio exceeding 50%, though exceptions can be made.
11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending. 21% to 35%: Although you may not have trouble getting new credit cards, you are spending too much of your monthly income on debt repayment. 36% to 50%: You may still qualify for certain loans, however it will be at higher rates.
Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more. The exact definition of debt free can vary, though, depending on whom you ask.
Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it. Credit agencies look for diversity in accounts, such as a mix of revolving and installment loans, to assess risk.
Statistics vary, but between 55 percent to 63 percent of Americans are likely living paycheck to paycheck.
Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued. It helps you free yourself from financial obligations at a time when your income is presumably stable and potentially even growing.
Between April and June 2023, Gen Z, people born between 1997 and 2012, had an average credit card balance of $3,328, a 4.23% increase from January to March 2023, where their average balance was $3,193, according to Credit Karma.
Which gender has more debt?
On average, men have more debt than women across all categories, except for student loans. While there isn't much data yet, early studies have shown that nonbinary students undergo more financial strain than their cisgender peers, and are more likely to have student loan debt.
In the U.S., the average credit score is 716, per Experian's latest data from the second quarter of 2023. And when you break down the average credit score by age, the typical American is hovering near or above that score.
Generally speaking, most mortgage lenders use a 43% DTI ratio as a maximum for borrowers. If you have a DTI ratio higher than 43%, you probably are carrying too much debt because you are less likely to qualify for a mortgage loan.
It does not include health insurance, auto insurance, gas, utilities, cell phone, cable, groceries, or other non-recurring life expenses. The debts evaluated are: Any/all car, credit card, student, mortgage and/or other installment loan payments.
While you can still apply for and receive a mortgage loan with a high DTI, it's best to look for ways to lower the ratio if possible. This will help you get a better interest rate.
