What is the debt-to-income ratio and why is it important for managing credit?

The debttoincome (DTI) ratio is a measure of how much of your monthly income is dedicated to paying off debts. Lenders use this ratio to assess your ability to handle new credit and make timely payments. To calculate your DTI ratio, you divide your monthly debt payments by your gross monthly income (before taxes). For example, if you have a total of ₹50,000 in monthly debt payments (including credit card bills, loan payments, and other debts) and your gross monthly income is ₹1,50,000, your DTI ratio would be 33% (₹50,000 ÷ ₹1,50,000 = 0.33 or 33%).

A high DTI ratio can indicate that you are already carrying a lot of debt, which can make it harder to get approved for new credit. It can also indicate that you may be at risk of not being able to make your monthly debt payments, which can damage your credit score and lead to other financial problems. Lenders generally prefer to see a DTI ratio below 36%, although the specific threshold can vary depending on the lender and the type of credit you are applying for.

Managing your DTI ratio is an important part of managing your credit because it can impact your ability to get approved for new credit, as well as the interest rates and terms you may be offered. By keeping your DTI ratio low and making your monthly debt payments on time, you can improve your creditworthiness and increase your chances of getting approved for new credit at favorable terms.