Debt-to-Income Ratios & Credit Scores

by Michael Keenan
Banks still look at your debt-to-credit ratio, even though it's not reflected in your score.

After your name, one of the first things a potential lender wants to know about you is your credit score. Clearing up misconceptions about your credit score, as well as understanding what factors do affect your credit score, can help you make sure your score is as good as it can be before you go applying for loans. Plus, even though your debt-to-credit ratio doesn't affect your score, it can still affect your loan approval.

Debt-to-Income Score Impact

Because your credit score only attempts to predict the possibility of you defaulting on a loan based on how you've handled debt in the past, your debt-to-income ratio has zero impact on your credit score. That's because your credit score is based only on how you've managed your debts, not how much you make. Your income and your other assets -- such as savings accounts, checking accounts and investment accounts -- don't show up in your credit report at all, much less affect your credit score.

Credit Utilization Ratio

A different debt ratio is included in your credit score, and in fact plays an important role. Your debt-to-available credit ratio, commonly called the credit utilization ratio, measures how much you owe on your various credit lines relative to your credit limits. For example, if you have a $1,000 balance on your credit card and a $5,000 limit, your credit utilization ratio is 20 percent. This factor goes under the amounts owed category, which accounts for 30 percent of your credit score.

Income Still Matters

Even though your income doesn't affect your credit score, that doesn't mean it's irrelevant to lenders. Your credit score, while very important, is just one factor that lenders look at when deciding whether to make you a loan or not. For example, if your salary is only $3,000 and you have $500 in debt payments each month, your bank isn't going to give you a mortgage that requires a $2,200 monthly monthly payment, even if you have a perfect credit score.

What's Included

Your debt-to-income ratio includes your monthly payments on all your debts, like your mortgage, student loans, car loan or other personal loans. If you carry balances on your credit cards, count the minimum payments on those, too. However, you don't count your monthly living expenses, even if they're recurring as well. For example, even though you pay a $100 cell phone bill each month, that doesn't count toward your debt-to-income ratio. But, the $50 minimum payment you must make on your credit card balance does.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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