Is Your Debt-to-Income Ratio Telling You It’s Time to Get Debt Help?

If your DTI is over 36 percent, then it’s time to act and find debt relief.

It’s a question that people with credit card debt ask all the time – how do I know when I have too much debt to handle it on my own? You want to do the right thing for your finances and you’d probably prefer to do it without outside help. But at a certain point, you simply may have too much debt to get out of it on your own. So, how do you know when it’s time to call in the professionals for debt help?

One good measure is to use your debt-to-income ratio (DTI). That’s a tool that lenders use to decide if you have too much debt when you apply for a new loan. If you’re overburdened with debt, it makes you more likely to default because you won’t be able to afford to pay a loan back. Lenders check your DTI to see if you already have too much debt. If you do, they won’t approve you for the new loan. For most lenders, the cut off is around 41-45 percent, with the new loan payments factored in.

With that in mind, you can monitor your own debt-to-income ratio to see when you’re getting overextended. A good rule of thumb is to keep your DTI at around 36 percent or less. That way, you won’t get denied for loans because your debt-to-income ratio is too high. You’ll always be able to get new financing when you need it because you should be able to comfortably afford all your debt payments.

If your DTI is over 36 percent, it’s usually a sign you need debt help

Call a certified credit counselor for debt help

“When people call Consolidated Credit for credit counseling, we use debt-to-income ratio to evaluate if a person has become overextended with debt,” explains Gary Herman, President of Consolidated Credit. “We track DTI of the people we provide credit counseling to in order to identify new trends in consumer debt. And currently the debt-to-income ratio of the people we’re talking to is increasing in most parts of the country.”

The map at the top of this page shows the average debt-to-income ratio of people who call for credit counseling. In most states nationwide, debt-to-income ratio levels are on the rise. Even in the 11 states where DTI decreased, only three have an average debt-to-income ratio that’s below the recommended 36 percent – Oklahoma, Arkansas and West Virginia. In 12 states plus the District of Columbia, the average DTI of someone seeking debt help is above 45 percent:

Washington D.C.54.3%
New York47.6%
New Jersey47.2%
Connecticut47.0%
Oregon46.1%
Maryland45.8%
California45.6%
Alaska45.5%
South Dakota45.5%
Hawaii45.3%
Virginia45.2%
Illinois45%

“If your debt-to-income ratio is above 45 percent, then you need to seek help immediately,” Herman says. “You’re in a situation where you won’t be able to find a lender that will approve you if you need a loan. You won’t qualify to buy a car or a home, and you also won’t be able to use do-it-yourself debt relief solutions, like debt consolidation loans, to get out of debt.”

The demographics of debt-to-income ratio

The average U.S. consumer has a DTI of 32.3% – meaning a large number of Americans are able to maintain a healthy debt level. However, the average debt-to-income ratio of people calling for credit counseling is 11 points higher at 43.5 percent.

What’s more, the people with the highest debt-to-income ratio were those nearing retirement.

  • Credit users as 50-69 had the highest DTI of any age group at 45.4 percent.
  • Those 20-29 had the lowest at 38.4 percent.
  • Men age 30-49 had a higher DTI of women the same age by one percentage point higher – 44 percent for men in that age group versus 32 for women.

Assessing your own debt-to-income ratio to decide if it’s time to get help

Consolidated Credit offers a free debt-to-income ratio calculator that can help you easily determine your current DTI. Debt-to-income ratio measures your current total monthly debt payments versus your total monthly income. Debt payments include things like alimony and child support, since those are obligations you’re supposed to meet. It also includes any medical or dental bills that you owe out-of-pocket. It does not include things like utilities, groceries, or other daily expenses.

Contributors :
April Lewis-Parks [email protected] Director of Education and Corporate Communications
Meghan Alard [email protected] Financial Literacy Specialist

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April Lewis-Parks
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