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Credit Utilization Ratio vs. Debt-to-Income Ratio: What’s the Difference?

Credit Score, Personal Finance
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Credit Utilization Ratio vs. Debt-to-Income Ratio: What's the Difference?

Credit utilization ratio and debt-to-income ratio can both have an effect on whether you get approved for a loan or credit card. But only credit utilization affects your credit score.

Your credit utilization ratio (sometimes called balance-to-limit ratio) is a measure of how much credit you’re using compared with how much you have available. For example, let’s say that you have a $10,000 credit limit on your card and your current balance is $4,000. To calculate your credit utilization ratio, simply divide your balance by your limit and move the decimal two places to the right:

4,000/10,000 = .40 or 40%

Too much math? Here’s a calculator you can use to check your utilization ratio on up to three cards.

Your debt-to-income ratio (abbreviated DTI) is a calculation of how much of your monthly income is devoted to debt payments and certain other financial obligations. Payments that should be factored into your DTI include:

  • Monthly rent or mortgage payments (including taxes and insurance).
  • Minimum monthly credit card payments.
  • Monthly auto and student loan payments.
  • Monthly child support or alimony payments.
  • Monthly payments on any other type of loan.

Once you’ve added up all these obligations, divide the total by your monthly gross (pre-tax) income to arrive at your DTI. (Here’s a debt-to-income ratio calculator to make it easy.)

For example, let’s say that you pay $500 per month toward your auto loan, $250 per month in minimums on your credit cards, and have a monthly mortgage payment of $1,300. Your annual salary is $70,000.

Total monthly payment obligations: 500+250+1,300 = $2,050
Gross monthly income: 70,000/12 = $5,833
DTI = 2,050/5,833 = .35 or 35%

Do they both affect my credit score?

No, only your credit utilization ratio will affect your credit score. In fact, a whopping 30% percent of your FICO score (the scoring model used in most lending decisions) is determined by this ratio. VantageScore, FICO’s competitor, doesn’t give percentages, but calls credit utilization “highly influential.” In general, it’s best to keep your credit utilization ratio below 30% on any single credit card and across all them together — and lower is better.

It’s important to note that your credit utilization ratio is influenced almost entirely by your revolving credit card debt. The amount of credit you’re usng on other types of loans makes very little difference.

Although your debt-to-income ratio isn’t used to calculate your credit score, you should still pay close attention to it. DTI is a big factor lenders use to decide whether to lend to you, because it indicates how able you are to take on an additional financial obligation.

Banks set their own DTI standards, so an acceptable DTI with one lender might be considered too high with another. However, most consider a DTI of 36% or lower to be adequate to qualify for a conventional mortgage, so aim for that.

Take one important step to improve both figures

When it comes to both your credit utilization ratio and your debt-to-income ratio, lower is better. Keeping both figures as low as possible will improve your chances of getting financing on good terms.

The great news is that taking just one step — reducing the balances on your credit cards — will help both numbers drop. Follow these tips to get your credit cards paid off, pronto:

  • Stop charging. You won’t make progress on repaying your credit card debt if you keep adding to the pile. Put your cards aside for now.
  • Make a budget. Create a plan for your income that allocates a large chunk of change to debt payoff.
  • Track your spending. The best way to keep your budget humming along is stay on top of your spending. Track where your money is going and your budget is more likely to be a success. You can find online tools to help.
  • Find ways to increase your income. Whether you sell your time or your possessions, additional money will free up more cash for debt payoff and improve the “income” part of your DTI.
  • Pay off cards in order of interest rate. You’ll save the most on interest if you pay off the card with the highest interest rate first, then the next highest interest rate, and so on.

This article was updated Aug. 8, 2016. It originally published June 12, 2014.