Debt-To-Income Ratio: The Lower the Better
“A Debt-To-Income (DTI) Ratio is the financial metric that compares your monthly debt payments to your income amount before deductions. It can show how much pressure your debt adds to your monthly budget, and it is a handy calculation for credit providers to make informed decisions concerning debt applications. As a rule of thumb, lenders generally seek ratios of no more than 36 percent (%) – the lower your percentage reflects, the better your financial position and the chance of having new credit being granted,”
Wikus Olivier, managing director here at CreditSmart Financial Services.
How to Calculate Your DTI Ratio:
| Add up all your monthly debt payments, for example, your vehicle finance, home loan(s), and unsecured credit like your credit card or personal loan. | R (total monthly debt amount) |
| Divide the above total by your monthly earnings/income amount before deductions or tax. | ÷ R (gross income amount) |
| Multiply the total by 100. | (amount) x 100 |
| Debt-To-Income (DTI) Ratio/Percentage | = ____ % |
Understand What Your DTI Percentage Means (The Lower the Better):
A lower DTI Ratio is better when applying for credit as it indicates you are a ‘favourable borrower of debt’. If your DTI Ratio is higher, lenders may see you as a ‘riskier borrower’. Consider these classifications and tips to understand what your DTI percentage entails:
| Healthy/Good & Low Risk | Between 0 to 29% | You may have many lending options and most likely have money left after paying your bills. Remember to tuck some away as savings. *TIP: Just because you have the right to credit, as a consumer, does not mean you have to take on more debt. |
| Acceptable & Manageable Risk | Between 30 to 39% | Standard lending terms may apply. *TIP: Take caution when considering more debt. Focus on your needs and shy away from those wants. |
| Moderate Risk | Between 40 to 49% | Your credit profile may need some improvement. Consider lowering your DTI to handle any financial curveball that may come your way. *TIP: Pay your bills on time, try to lower your debt, and cut on luxuries. |
| High Risk | Between 50 to 59% | Stricter lending terms may apply, and you may not have much money left to save or deal with life’s unexpected blows. *TIP: Avoid taking on additional or unnecessary debt, consider a side hustle to increase your income, and try high and low to lower your current debt. |
| Very High-Risk | 60% plus/and above | Lenders may limit or decline your borrowing options. You may be experiencing severe over-indebtedness or receive countless phone calls from creditors due to account arrears. DID YOU KNOW? “On average, South African consumers need to spend above 60% of their take-home income to service their debt,” confirms a concerned Olivier. *TIP: Communicate with your creditors (for example, your change in circumstances) and try to negotiate. If you negotiated with your creditors, worked through your budget, and can’t seem to cut your debt or increase your income, then a regulated option or professional help can be the route to choose. Do your homework and seek the ideal solution to suit your needs. |
Calculating and understanding your DTI Ratio or balance is crucial to improving your credit status and securing financial stability. Consider the above info and tips regarding your DTI percentage, and always try to keep it as low as possible. Don’t lose hope if you experience over-indebtedness, be proactive at best and find a suitable solution to help improve your financial situation.
