Highlights:

• The debt-to-credit and debt-to-income relationships can help lenders evaluate your solvency.
• Your debt-to-credit ratio can affect your credit scores, while the debt-to-income ratio does not.
• Lenders and creditors prefer to see a lower debt-to-credit ratio when you apply for credit.

When it comes to credit scores, credit history, and credit reports, you may have heard terms like "debt-to-income ratio" and "debt-to-credit ratio." But what do these terms mean, and more importantly, how do they differ?

What is your debt-to-income ratio?

This ratio includes all your total monthly recurring debt: credit card balances, rent or mortgage payments, vehicle loans, and more.

How is your DTI ratio calculated?

For example, if you have $2,000 of debt each month and your gross monthly income is $6,000, your DTI ratio would be 33 percent. In other words, you spend 33 percent of your monthly income on paying your debts.

Why is your DTI ratio important?

How to reduce your DTI ratio

Here are some steps you can take to help reduce your DTI ratio:

1. Increase the amount you pay each month towards your existing debt. You can do this by paying more than the minimum monthly payments on your credit card accounts, for example. This can help reduce your overall debt quickly and effectively.
2. Avoid increasing your total debt. If you feel the need to apply for additional loans, first try to reduce the amount of your existing debt.
3. Postpone large purchases. Prioritize reducing your DTI ratio before making significant purchases that could generate additional debt.
4. Monitor your DTI ratio. Tracking your DTI ratio and seeing the percentage decrease as a direct result of your efforts can motivate you to continue reducing your DTI ratio, which can help you better manage your long-term debt.

What is your debt-to-credit ratio?

Revolving credit accounts include things like credit cards and lines of credit. They don't require a fixed payment each month, and you can reuse the credit as you pay down your balance. 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 off, the account is closed. Installment loans are generally not included in your debt-to-credit ratio.

How is your debt-to-credit ratio calculated?

For example, let's say you have two credit cards with a combined credit limit of $10,000. If you owe $4,000 on one card and $1,000 on the other for a combined total of $5,000, your debt-to-credit ratio is 50 percent.

Why is your debt-to-credit ratio important?

What is the difference between your debt-to-credit ratio and your DTI ratio?

Your debt-to-credit ratio refers to the amount you owe on all your revolving credit accounts compared to the amount of revolving credit available to you. Your debt-to-credit ratio can be a factor in calculating your credit scores, depending on the scoring model used. Other factors may include your payment history, length of credit history, how many credit accounts you have opened recently, and the types of credit accounts you have.

Your DTI ratio refers to the total amount of debt you have each month compared to your total monthly income. Your DTI ratio does not directly affect your credit score, but it is a factor that lenders may consider when deciding whether to approve you for additional credit.

Familiarizing yourself with both ratios can give you a better understanding of your credit situation and help you anticipate how lenders will view you when you apply for credit.