Do credit cards count in debt-to-income ratio?
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
To calculate debt-to-income ratio, divide your total monthly debt obligations (including rent or mortgage, student loan payments, auto loan payments and credit card minimums) by your gross monthly income.
The following payments should not be included: Monthly utilities, like water, garbage, electricity or gas bills. Car Insurance expenses. Cable bills.
Credit card debt is a type of unsecured liability that is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower's credit card accounts will be reported and tracked by credit bureaus.
However, the CFPB has recommended that homeowners keep their DTI ratio at 36 percent or less [PDF] and that renters keep their DTI ratio at 15 to 20 percent or less. So, these figures are usually taken into consideration when credit cards are in question.
Owning more than two or three credit cards can become unmanageable for many people. However, your credit needs and financial situation are unique, so there's no hard and fast rule about how many credit cards are too many. The important thing is to make sure that you use your credit cards responsibly.
Having credit card debt isn't going to stop you from qualifying for a mortgage unless your monthly credit card payments are so high that your debt-to-income (DTI) ratio is above what lenders allow.
Yes, you can qualify for a home loan and carry credit card debt at the same time.
To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
Credit card debt is typically the most expensive debt you can take on. Interest rates on credit cards are typically well into the double-digits and often above 20% — even for people with good credit. By contrast, the best interest rates on student loans, mortgages and personal loans can be well under 10%.
What is considered really bad credit card debt?
If your total balance is more than 30% of the total credit limit, you may be in too much debt. Some experts consider it best to keep credit utilization between 1% and 10%, while anything between 11% and 30% is typically considered good.
If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI 1 may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you.
The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the third quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.
What is the 5/24 rule? Many card issuers have criteria for who can qualify for new accounts, but Chase is perhaps the most strict. Chase's 5/24 rule means that you can't be approved for most Chase cards if you've opened five or more personal credit cards (from any card issuer) within the past 24 months.
Credit experts advise against closing credit cards, even when you're not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
So, while there is no absolute number that is considered too many, it's best to only apply for and carry the cards that you need and can justify using based on your credit score, ability to pay balances, and rewards aspirations.
Credit score and mortgages
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
Broadly speaking, there are two ways to improve your DTI ratio: Reduce your monthly debt payments, and increase your income.
Has anyone ever bought a house with a credit card?
You can buy a house with credit cards if you have a high enough credit line, but that is not a mortgage, so where does the mortgage come into the picture? Credit card loans don't have to be ever paid back as long as you make the minimum payments, so if you can pay in 5 years, you will help your credit score and ...
You're about to get a mortgage or other loan
If you're shopping around for a mortgage, personal loan or car loan, it's best to avoid applying for a new credit card. Whether you are approved or not, the increased number of hard inquiries on your credit report could drop your credit score.
The Bottom Line. Using a personal loan to pay off credit card debt can have several benefits. Personal loans typically have lower interest rates than credit cards, which can help you save money on interest charges and pay off your debt more quickly.
This means your total monthly debts, including your prospective mortgage and any other debts like car payments or credit card bills, shouldn't exceed 43% of your monthly income.
1) Add up the amount you pay each month for debt and recurring financial obligations (such as credit cards, car loans and leases, and student loans). Don't include your rental payment, or other monthly expenses that aren't debts (such as phone and electric bills).
