What is a Debt to Credit Ratio?

Reading time: 3 minutes

Highlights:

  • Debt to credit and debt to income ratios can help lenders assess your creditworthiness
  • Your debt to credit ratio may impact your credit scores, while debt to income ratios do not
  • Lenders and creditors prefer to see a lower debt to credit ratio when you're applying for credit

When it comes to credit scores, credit history and credit reports, you may have heard terms like "debt to credit ratio," "debt to credit utilization ratio," "credit utilization rate" and "debt to income ratio" thrown around. But what do they all mean, and more importantly, are they different?

Debt to credit ratio (aka credit utilization rate or debt to credit utilization ratio)

Your debt to credit ratio, also known as your credit utilization rate or debt to credit rate, generally represents the amount of revolving credit you’re using divided by the total amount of credit available to you, or your credit limits.

What’s revolving credit? Revolving credit accounts include things like credit cards and lines of credit. They don’t have a fixed payment each month, and you can re-use the credit as you pay your balance down. (On the other hand, installment loans are things like a mortgage or a vehicle loan, with a fixed payment each month. When installment loans are paid, the account is closed. Installment loans generally are not included in your debt to credit ratio.)

An example of how a debt to credit ratio may be calculated: If you have two credit cards with a combined credit limit of $10,000, and you owe $4,000 on one card and $1,000 on the other, your debt to credit ratio is 50 percent, as you’re using half of the total amount of credit available to you.

Here’s why your ratio matters: When evaluating your request for credit, lenders and creditors look at several factors, which may include your debt to credit ratio. If your ratio is high, it’s one indication you could be a higher-risk borrower who may have trouble paying back a loan because you have more debt. In general, lenders and creditors like to see a debt to credit ratio of 30 percent or below.

Debt to income ratio (aka DTI)

Your debt to income ratio is the total amount you owe every month divided by the total amount of money you earn each month, usually expressed as a percentage. 

This ratio includes your total recurring monthly debt -- meaning credit card balances, rent or mortgage payments, vehicle loans and more. To calculate your debt to income ratio, divide your total recurring monthly debt by your gross monthly income -- the total amount you make each month before taxes, withholdings and expenses. 

For example, if you have $2,000 in debt each month and you make $6,000 in gross monthly income, your debt to income ratio would be 33 percent. In other words, you spend 33 percent of your monthly income on your debt payments.

The difference between debt to credit and debt to income ratios

Your debt to credit ratio may be one factor in calculating your credit scores, depending on the credit scoring model (method of calculation) used. Other factors may include your payment history, the length of your credit history, how many credit accounts you've opened recently and the types of credit accounts you have.

Your debt to income ratio doesn't impact your credit scores, but it's one factor lenders may evaluate when deciding whether or not to approve your credit application. 

Familiarizing yourself with both ratios and calculating them may help give you a better idea of your particular credit situation and what lenders and creditors may see if you're applying for credit.