Members who are preparing to apply for a loan tend to focus on the same things. They pay bills on time, monitor their credit score, and try to avoid taking on additional debt before applying. Whether they’re buying a vehicle, consolidating debt, or preparing to purchase a home, many assume that good credit will guarantee approval.

However, the answer is often more complicated. A borrower may have excellent credit, stable income, and years of responsible financial habits, yet still encounter an unexpected obstacle during the approval process. While most would assume their credit score is the issue, another number often plays an equally important role – your debt-to-income ratio.

This figure receives far less attention than credit scores, but it can significantly influence borrowing decisions. Understanding how it works can help borrowers avoid surprises and approach future loans with greater confidence.

Credit Scores Tell Only Part of the Story
We’re conditioned to believe our credit score is the deciding factor when applying for a loan. Television commercials advertise them, mobile apps monitor them, and borrowers often check their scores long before they ever apply.

A strong credit score certainly helps because it gives lenders insight into your payment history, credit management habits, and past borrowing behavior. But lenders also need to answer another important question:

“Can this borrower comfortably handle another monthly payment?”

While your credit score can tell lenders how you’ve handled debt in the past, your debt-to-income ratio helps them understand your ability to handle debt today.

Consider two borrowers. One has an excellent credit score but already has several open loans. The other has a slightly lower score but fewer financial obligations. The second borrower might be in a better position to handle a new loan and monthly payment.

That is why both numbers matter.

Looking Beyond the Credit Score
Your debt-to-income ratio, often called DTI, compares your monthly debt payments to your gross monthly income. Put simply, it measures how much of your income is already spoken for before a new payment enters the picture.

To illustrate how DTI comes into play, consider the following example:

Gross Monthly Income (Household)	$8,000
Mortgage Payment	$2,000
Car Loan Payment	$500
Credit Card Payments	$150
Student Loan Payment	$350

 

Your total monthly debt payments equal $3,000 while your gross household monthly income is $8,000. As a result, your debt-to-income ratio is 37.5%.

What is an Ideal DTI Ratio?
Every lender uses different guidelines, and various loan programs often have different requirements. Because of that, debt-to-income ratios should never be viewed as a pass-or-fail test.

Generally speaking:

• Lower ratios often create more financial flexibility.
• Higher ratios may limit some borrowing options.
• Many lenders begin paying closer attention as ratios approach 40% or higher.

The number itself is not necessarily good or bad. Instead, it serves as a tool that helps evaluate affordability.

Someone with a higher ratio may still qualify for financing. Another borrower with a lower ratio may face different circumstances. The purpose is not to seek a perfect number. It is understanding how comfortably a new payment fits into the overall budget.

Lenders See the Entire Financial Picture
A loan payment rarely exists by itself. Households still need to pay for groceries, utilities, insurance premiums, fuel, internet service, childcare, medical expenses, and the countless costs that come with everyday life. Those expenses may never appear on a loan application, but they still affect a family’s ability to manage another payment.

Imagine a household that already feels stretched at the end of each month. Adding another payment may look manageable on paper, but even a modest increase can leave very little room for unexpected expenses.

This is one reason lenders pay close attention to debt-to-income ratios.

Financial institutions are not trying to prevent people from borrowing or achieving their goals. In many situations, they are trying to avoid placing borrowers into financial situations that may become difficult to manage later. Approvals are based on both willingness to repay and ability to repay, and debt-to-income ratios help lenders evaluate that balance.

Why this Number Matters Beyond the Loan Approval
Most borrowers never think about their debt-to-income ratio until they apply for financing. Yet the number often affects daily financial life long before an application is submitted.

When debt payments consume a large portion of income, several things become more difficult:

• Building emergency savings.
• Preparing for retirement.
• Handling major repairs.
• Covering medical expenses.
• Saving for future goals.

A household with very little breathing room may still make every payment on time, but unexpected expenses can quickly create financial stress.

Financial flexibility is often one of the most valuable aspects of a healthy financial plan. Insurance premiums increase, cars break down, and unexpected expenses eventually appear. Having room in the budget helps households adapt when life becomes expensive.

Know Your Number Before You Apply
Members usually check their credit score before applying for a loan. Reviewing your debt-to-income ratio can be just as valuable. To calculate your DTI, begin by adding your monthly debt obligations, such as:

• Mortgage or rent payments
• Vehicle loans
• Student loans
• Credit card minimum payments
• Personal loans
• Other installment debt

Next, divide those payments by your gross monthly income before taxes and deductions.

You don’t need complicated software or financial calculators. A few monthly statements and a calculator can provide valuable insight into your current financial situation.

Understanding this number ahead of time can help you adjust expectations, identify opportunities for improvement, and avoid surprises during the application process.

Creating More Room in the Budget
The encouraging news is that debt-to-income ratios can change. Income may increase through raises, overtime opportunities, promotions, side work, or additional household income. Even modest increases can strengthen the ratio and create additional flexibility.

Reducing debt often creates the biggest impact. Some borrowers choose to:

• Pay extra toward credit cards.
• Eliminate smaller balances.
• Apply tax refunds toward debt.
• Round up monthly payments.

For example, increasing a $525 car payment to $600 each month may not seem dramatic, but those additional dollars can gradually reduce the balance faster than expected.

Refinancing existing loans can also improve cash flow. Lower monthly payments may create additional room in the budget while reducing financial pressure.

Debt consolidation may also be especially helpful for borrowers managing several high-interest balances. Combining multiple payments into one fixed payment at a lower interest rate can:

• Simplify monthly budgeting with one payment vs. multiple.
• Reduce interest expenses and allow you to pay more toward your principal balance.
• Establish a clear payoff date and repayment plan.

Sometimes improving a debt-to-income ratio is not about earning dramatically more money. It’s about creating more space within the monthly budget.

When the Budget Starts Feeling Tight
Your budget often tells you what a lender may eventually see. Consider taking a closer look at your current financial obligations if:

• Most of your paycheck goes toward monthly payments.
• Saving money has become increasingly difficult.
• New expenses feel hard to absorb.
• Credit cards are being used frequently between paychecks.
• Unexpected costs immediately create financial stress.

These situations often suggest that existing obligations may be consuming too much of the household budget. Recognizing those signs early often creates more opportunities to improve them before applying for another loan.

We’re Here to Help!
While your credit score might be the first thing on your mind before you apply for a loan, figures like your debt-to-income ratio also play a significant role. By paying down existing debt, building savings, and exploring options like refinancing existing loans, you’ll improve your DTI and improve your loan approval odds.

If you want to learn more about loan approvals or speak with a lender about your credit score or debt-to-income ratio, we’re happy to help. Please stop by the Credit Union or call 410-687-5240 to speak with a team member today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.

7/8/26