topic Re: New blog article: Why Your Debt-to-Income Ratio Is So Important in Personal Finance

New blog article: Why Your Debt-to-Income Ratio Is So Important

Elizabeth_FICO — Wed, 19 Jan 2022 18:38:46 GMT

Hello everyone! If there's a new blog article that I think you guys might like I plan on posting it in the Forums.

This week's article is: Why Your Debt-to-Income Ratio Is So Important

Let me know what you think about the article.

For more content don't forget to check out our blog.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

brk1971 — Wed, 19 Jan 2022 19:34:43 GMT

My only comment on the article is about the first example shown - it doesn't include or address the housing cost. Yes the following section does mention it, but it'll always be part of the DTI, even if the amount is zero.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Tue, 25 Jan 2022 00:58:18 GMT

@Elizabeth_FICO wrote:
Hello everyone! If there's a new blog article that I think you guys might like I plan on posting it in the Forums.

This week's article is: Why Your Debt-to-Income Ratio Is So Important

Let me know what you think about the article.

"But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed."

I wish articles like this would address my situation, i.e., retired with a very small income, yet perfectly able to pay bills (thanks to money I socked away while working), and my DTI being totally irrelevant.

Generally speaking, I don't carry large balances on credit cards. When I do carry balances, they're at 0% interest. Right now I'm doing some major renovation stuff at my house, including completely redoing my bathroom, and buying a new refrigerator (delivered today, actually!), putting everything on CCs. If you look at my *current* DTI ratio, it sucks! Yet I have no stress whatsoever about being able to pay my bills--and neither should my creditors. I've PROVEN that I'm capable of paying very large debts (can you say 6-figure medical bills? I can!), regardless of what my DTI says.

I understand that DTI is just another piece of the credit-granting puzzle, and I get that it has its place, but it just annoys me that it's thought of in such black-and-white terms when circumstances vary so much from individual to individual.

/rant

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

iced — Tue, 25 Jan 2022 17:59:02 GMT

@SoCalGardener wrote:
@Elizabeth_FICO wrote:
Hello everyone! If there's a new blog article that I think you guys might like I plan on posting it in the Forums.

This week's article is: Why Your Debt-to-Income Ratio Is So Important

Let me know what you think about the article.

"But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed."

I wish articles like this would address my situation, i.e., retired with a very small income, yet perfectly able to pay bills (thanks to money I socked away while working), and my DTI being totally irrelevant.

Generally speaking, I don't carry large balances on credit cards. When I do carry balances, they're at 0% interest. Right now I'm doing some major renovation stuff at my house, including completely redoing my bathroom, and buying a new refrigerator (delivered today, actually!), putting everything on CCs. If you look at my *current* DTI ratio, it sucks! Yet I have no stress whatsoever about being able to pay my bills--and neither should my creditors. I've PROVEN that I'm capable of paying very large debts (can you say 6-figure medical bills? I can!), regardless of what my DTI says.

I understand that DTI is just another piece of the credit-granting puzzle, and I get that it has its place, but it just annoys me that it's thought of in such black-and-white terms when circumstances vary so much from individual to individual.

/rant

Even retirees/people living off invested assets still have a DTI, so it's not irrelevant. Your lower income is going to be offset by making a larger down payment, but at the end of a day a bank isn't going to loan based on potential income -- they want to see realized income.

My mortgage lender wasn't going to loan me money on the premise I make payments out of investment drawdown. I could report regular dividends as income, but if I wanted the leverage the rest in my home purchase, it would be as a down payment.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Tue, 25 Jan 2022 18:45:03 GMT

@iced wrote:
@SoCalGardener wrote:
@Elizabeth_FICO wrote:
Hello everyone! If there's a new blog article that I think you guys might like I plan on posting it in the Forums.

This week's article is: Why Your Debt-to-Income Ratio Is So Important

Let me know what you think about the article.

"But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed."

I wish articles like this would address my situation, i.e., retired with a very small income, yet perfectly able to pay bills (thanks to money I socked away while working), and my DTI being totally irrelevant.

Generally speaking, I don't carry large balances on credit cards. When I do carry balances, they're at 0% interest. Right now I'm doing some major renovation stuff at my house, including completely redoing my bathroom, and buying a new refrigerator (delivered today, actually!), putting everything on CCs. If you look at my *current* DTI ratio, it sucks! Yet I have no stress whatsoever about being able to pay my bills--and neither should my creditors. I've PROVEN that I'm capable of paying very large debts (can you say 6-figure medical bills? I can!), regardless of what my DTI says.

I understand that DTI is just another piece of the credit-granting puzzle, and I get that it has its place, but it just annoys me that it's thought of in such black-and-white terms when circumstances vary so much from individual to individual.

/rant
Even retirees/people living off invested assets still have a DTI, so it's not irrelevant. Your lower income is going to be offset by making a larger down payment, but at the end of a day a bank isn't going to loan based on potential income -- they want to see realized income.

My mortgage lender wasn't going to loan me money on the premise I make payments out of investment drawdown. I could report regular dividends as income, but if I wanted the leverage the rest in my home purchase, it would be as a down payment.

A larger down payment? On what? I haven't bought anything, nor do I intend to, that would require a down payment. So that's not an issue.

Also, some of my creditors asked for [optionally], and I provided, my assets. So they have that on file and can use it to make decisions. Even with my low income, I've never had an issue getting higher CLs or new credit; I've noted before when people see "income too low" (or similar) as a denial reason, that I haven't seen that. I don't know if these are all related somehow!

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

iced — Tue, 25 Jan 2022 20:54:59 GMT

@SoCalGardener wrote:
A larger down payment? On what? I haven't bought anything, nor do I intend to, that would require a down payment. So that's not an issue.

Also, some of my creditors asked for [optionally], and I provided, my assets. So they have that on file and can use it to make decisions. Even with my low income, I've never had an issue getting higher CLs or new credit; I've noted before when people see "income too low" (or similar) as a denial reason, that I haven't seen that. I don't know if these are all related somehow!

If the point you're making is that you are able to afford anything you need because of accumulated investments, then DTI (and many other things, including your credit scores really) are going to be largely meaningless because you don't utilize any of those services. As long as you have a decent score and some form of regular income, it's sufficient. It doesn't matter what your DTI is in this case because your D is 0, which is why your situation isn't usually discussed.

If you're just talking credit cards, then DTI isn't that important for most people. Some creditors ask about the amount for your monthly housing payment, but that's only part of DTI and I've yet to have a credit card application ask me for anything beyond general income and that monthly housing cost. They don't ask for assets like a mortgage lender does. Most don't even ask for proof of income unless some red flag triggers in their system. If they do, it's because they can't make a risk determination, but generally don't have to.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

CreditInspired — Wed, 26 Jan 2022 12:14:46 GMT

Thanks Elizabeth for sharing a great article, and I did learn something new, which I extracted below:

Your debt payments include minimum payments on your credit cards, loan payments and even payments on loans for which you're a co-signer — even if you're not making any of the payments yourself.

It never dawned on me that even when the monthly payments are made on time as agreed by the #1 signer, that monthly payment due is still used in calculating the #2 signer DTI. So in addition to hoping #1 doesn't default, this is another reason for not co-signing a loan for anyone.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Thu, 27 Jan 2022 22:33:48 GMT

@iced wrote:
@SoCalGardener wrote:
A larger down payment? On what? I haven't bought anything, nor do I intend to, that would require a down payment. So that's not an issue.

Also, some of my creditors asked for [optionally], and I provided, my assets. So they have that on file and can use it to make decisions. Even with my low income, I've never had an issue getting higher CLs or new credit; I've noted before when people see "income too low" (or similar) as a denial reason, that I haven't seen that. I don't know if these are all related somehow!
If the point you're making is that you are able to afford anything you need because of accumulated investments, then DTI (and many other things, including your credit scores really) are going to be largely meaningless because you don't utilize any of those services. As long as you have a decent score and some form of regular income, it's sufficient. It doesn't matter what your DTI is in this case because your D is 0, which is why your situation isn't usually discussed.

If you're just talking credit cards, then DTI isn't that important for most people. Some creditors ask about the amount for your monthly housing payment, but that's only part of DTI and I've yet to have a credit card application ask me for anything beyond general income and that monthly housing cost. They don't ask for assets like a mortgage lender does. Most don't even ask for proof of income unless some red flag triggers in their system. If they do, it's because they can't make a risk determination, but generally don't have to.

But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

Citylights18 — Fri, 28 Jan 2022 06:33:19 GMT

Two things most people don't know about DTI planning.

1) You could go up to 50% DTI on a home or loan. Conservative lenders might cap you out at 36%.

2) Instead of buying what you can afford try to spend the least amount on something that you can get away with. If you need a family sized car try to go with something that you can get for $300-$400 a month rather than a $800 car payment.

Its possible to stretch in some areas like for a house if you don't have a car payment. But also consider how much you could rent your house for if you suddenly lost your job. A 1,500 sqft. house might rent for $2500 a month but one that is 3,000 sqft. might rent for only $3000, just $500 more though double the square feet.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

iced — Fri, 28 Jan 2022 16:00:38 GMT

@SoCalGardener wrote:
But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.

And that's why it's not usually talked about -- it is an academic discussion if it's not being used. Why build a system or have indicators that account for a population that will never utilize it?

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Fri, 28 Jan 2022 19:55:11 GMT

@iced wrote:
@SoCalGardener wrote:
But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.
And that's why it's not usually talked about -- it is an academic discussion if it's not being used. Why build a system or have indicators that account for a population that will never utilize it?

I see your point. But just as a reminder, what started this whole thing was this sentence in the article: "But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed." Its implication is that high DTIs may signal an inability to pay bills--but that's not necessarily true, like in my case, so it rubs me the wrong way. And creditors *do* take it into consideration without accounting for circumstances, such as having a low retirement income but money in the bank.

Sorry, this sounds very argumentative and that's truly not my intent. Just trying to get my point across!

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

dragontears — Sun, 30 Jan 2022 21:35:57 GMT

@SoCalGardener wrote:
@iced wrote:
@SoCalGardener wrote:
But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.
And that's why it's not usually talked about -- it is an academic discussion if it's not being used. Why build a system or have indicators that account for a population that will never utilize it?
I see your point. But just as a reminder, what started this whole thing was this sentence in the article: "But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed." Its implication is that high DTIs may signal an inability to pay bills--but that's not necessarily true, like in my case, so it rubs me the wrong way. And creditors *do* take it into consideration without accounting for circumstances, such as having a low retirement income but money in the bank.

Sorry, this sounds very argumentative and that's truly not my intent. Just trying to get my point across!

So you want all general financial blogs/articles to include your outlier situation?

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

disdreamin — Mon, 31 Jan 2022 02:21:46 GMT

@dragontears wrote:
So you want all general financial blogs/articles to include your outlier situation?

I didn't see anyone say that, but I also don't think the sitution is that much of an outlier. There are many retirees with sufficient investments that allow them flexibility in their spending well beyond what their typical income would suggest. Perhaps addressing this might be better as a separate article though, rather than an addendum to one about people still in the workforce.

As far as granting credit, it certainly seems as though considering investment accounts in addition to income might work better for anyone no longer in the workforce for whatever reason. I believe Chase offered a place for such accounts when I updated my income with them recently, and perhaps this type of situation is why. If someone has only modest annual income, but has millions in investments, it seems feasible that their ability to handle credit isn't well represented by just their "income".

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Mon, 31 Jan 2022 23:21:13 GMT

@disdreamin wrote:
@dragontears wrote:
So you want all general financial blogs/articles to include your outlier situation?
I didn't see anyone say that, but I also don't think the sitution is that much of an outlier. There are many retirees with sufficient investments that allow them flexibility in their spending well beyond what their typical income would suggest. Perhaps addressing this might be better as a separate article though, rather than an addendum to one about people still in the workforce.

As far as granting credit, it certainly seems as though considering investment accounts in addition to income might work better for anyone no longer in the workforce for whatever reason. I believe Chase offered a place for such accounts when I updated my income with them recently, and perhaps this type of situation is why. If someone has only modest annual income, but has millions in investments, it seems feasible that their ability to handle credit isn't well represented by just their "income".

Thank you. Very well said.

My mom was a great example of little income but high assets. Her monthly income was less than $800 when she died in 2013, but she owned a 7-figure home outright, had absolutely no debt, did a lot of travelling and sightseeing, loved going to casinos to play the slot machines, loved eating out, and just generally lived a very comfortable life. To put things in perspective, $800 couldn't even rent a CLOSET where we live!

Thankfully, her one and only credit account, Discover, based her credit limit on history, not income or DTI. This is the Discover card I've talked about before, which I 'inherited' when she died. I finally got its CL back into 5-figures, but it's still a far cry from where she had it. (They had to decrease the CL when they transferred it to my name, because my credit was still not great (recovering from my previous catastrophic illness), but I was grateful to have it.) She frequently ran the balance up on her Discover card, well into 5-figures; if there had been a snapshot of her credit at one of those moments, her DTI would've been OFF THE CHARTS! And, according to the sentence that started this whole thing, could mark her as unable to pay her bills...

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

SoCalGardener — Mon, 31 Jan 2022 23:27:20 GMT

@dragontears wrote:
@SoCalGardener wrote:
@iced wrote:
@SoCalGardener wrote:
But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.
And that's why it's not usually talked about -- it is an academic discussion if it's not being used. Why build a system or have indicators that account for a population that will never utilize it?
I see your point. But just as a reminder, what started this whole thing was this sentence in the article: "But your DTI is important because it helps creditors better understand your capacity to take on new debt and repay it as agreed." Its implication is that high DTIs may signal an inability to pay bills--but that's not necessarily true, like in my case, so it rubs me the wrong way. And creditors *do* take it into consideration without accounting for circumstances, such as having a low retirement income but money in the bank.

Sorry, this sounds very argumentative and that's truly not my intent. Just trying to get my point across!
So you want all general financial blogs/articles to include your outlier situation?

Outlier?! Um...I'm a Baby Boomer. Many of us have already retired (I did, early, due to illness), and millions more are in the process. I'd hardly call Baby Boomers outliers!

Also, a simple addition or modification, like "in some cases" or "this may not apply to" or similar, to the sentence that sparked this, would be fine. It's the blanket statement tone that bothered me.

Re: New blog article: Why Your Debt-to-Income Ratio Is So Important

DONZI — Sun, 27 Feb 2022 02:06:36 GMT

@SoCalGardener wrote:
@iced wrote:
@SoCalGardener wrote:
A larger down payment? On what? I haven't bought anything, nor do I intend to, that would require a down payment. So that's not an issue.

Also, some of my creditors asked for [optionally], and I provided, my assets. So they have that on file and can use it to make decisions. Even with my low income, I've never had an issue getting higher CLs or new credit; I've noted before when people see "income too low" (or similar) as a denial reason, that I haven't seen that. I don't know if these are all related somehow!
If the point you're making is that you are able to afford anything you need because of accumulated investments, then DTI (and many other things, including your credit scores really) are going to be largely meaningless because you don't utilize any of those services. As long as you have a decent score and some form of regular income, it's sufficient. It doesn't matter what your DTI is in this case because your D is 0, which is why your situation isn't usually discussed.

If you're just talking credit cards, then DTI isn't that important for most people. Some creditors ask about the amount for your monthly housing payment, but that's only part of DTI and I've yet to have a credit card application ask me for anything beyond general income and that monthly housing cost. They don't ask for assets like a mortgage lender does. Most don't even ask for proof of income unless some red flag triggers in their system. If they do, it's because they can't make a risk determination, but generally don't have to.
But there are times when my DTI ratio is high--like right now! I've spent a ton of money (all on credit cards) redoing my bathroom and buying a new refrigerator. If everything gets reported as they stand now, my DTI will suck big time! My utilization, both on a per-card and overall basis, will still be low (thanks to high CLs and no previous balances), but my DTI will be high.

I get it, that it's all academic in my case, since I'm not seeking or planning to seek any credit, big or small. Just saying that the general practice of using DTI as an indicator of being unable to pay bills doesn't *always* make sense.

First, thanks @Elizabeth_FICO and Ben Luthi for the article.

I've not really paid attention to my DTI but I think it's similar to your situation. I'm on a 20+ year sabbatical more or less. Expenses are basic monthly utilities, food, fuel and some trivial luxury services. My income is suitably leveled to cover that and a little extra. I'll pull in some earned income from time to time working for a short while.

Anyhow, AFAIK the only time DTI might fiddle with my FICO is when/if I let the charges I make on cards report. I used to just PIF before statement cuts, tried AZEO for a short time out of concern for my scores bouncing around. My total card limits are around 2x my income so sometimes I need to spread spend out or pay card balances multiple times if I'm spending more than basic expenses -- however for a few months I have just let them report and not worried about it. Scores jumping around a bit but have remained as shown in my sig +/- a few points.

..other than that, it's not created any problems doing what I want or need to do so I just don't worry about it anymore.

I've no solid proof of it, but I'm playing around with the idea that letting spend report via statement cuts with follow up PIF may paint a picture that is somewhat more visible to casual credit inquiries that may be taken by those concerned -- as opposed to having $0 statements all the time or AZEO.

Ultimately I just don't care that much for the time being. At such a time I want to apply for another credit card I'll probably do AZEO for a month or two beforehand to try and peak my scores.

Are there other eyes on DTI that is of concern in this/your scenario?

..what sort of problems has it created, if any?

Thanks!