Debt to Income and Utilization are two separate metrics used by underwriters.
Utilization is easier to compute. For aggregate utilization, just add up the balances on your all revolving accounts and then divide by your total credit limits. Do the same division for each account separately to get your individual utilization percentages.
DTI uses your gross annual income (before taxes) divided by 12 to get calculate your monthly income. Then, add up all your monthly debt expenses (installment loans, revolvers, etc.). If you have monthly housing expenses (like rent, HOA, etc.) that don't show up as debt on your credit report, add those in too. Then, divide by your monthly income.
(Edit to say: I've included examples in the following two posts.)
Examples of utilization calculations:
2 credit cards -
Card #1 has a $1000 balance with a $10000 limit. Individual utililzation is $1000/$10000=10%
Card #2 has a $2000 balance with a $10000 limit. Individual utilization is $2000/$10000=20%
Aggregate utilization is ($1000+$2000)/($10000+$10000)=15%
No monthly payment amounts are included in utilization calculations.
Example of Debt to Income calculation:
Annual income is $120,000 (made up of $100,000 salary, $10,000 bonus, $7000 side gigs, $3000 taxable investment income).
Monthly income is $120,000/12=$10,000
Monthly debt expenses are $4000 (made up of $2500 mortgage, $1000 auto loans, $400 student loan, $100 in credit card minimum payments).
Debt to income is $4000/$10000=40%
@FicoMike0 wrote:Thanks!
So, do they use the debt that's reported for utilization for dti as well? Say I have a $10000 limit and I spend $2000/month, but I pay it to $500 before posting, then my utilization is 5%, rather than 20%. If that's my only expense and my income is $5000/ month, then is my dti 10% ? Could I then lower my dti by paying the account to $100 every month, $100/$5000 = 2% ?
No. Debt to income for credit cards is calculated using the monthly minimum due amounts that are shown on your credit reports, not your total debt balances. To use your example, you would need to determine the credit card account's minimum amount due that is reported. If you had let $2000 report as your statement balance, what is the minimum payment due? Let's say $80. If you instead only let $500 report on your statement, then what is the minimum payment in that case? Let's say $25 is the lowest minimum due for that lender's policy. To calculate the difference it makes for your DTI ratio, add $80 to your other monthly debt payments to produce one ratio. Then, run the ratio again but only add $25 instead of $80. That's how much your DTI percentage will change.
Think of it from the point of view of a student loan. Your monthly payment is $400/month. Your total balance on the loan is $75,000. DTI is calculated using the $400, not the $75,000.
@FicoMike0 wrote:This is great info!
So, to calculate my dti I need to get my reports and find out what min payment is shown for each account.
My immediate use of this info is to support a cl I request I plan to make to wells and an initial app to navy. Do you think there is a min bracket for dti? Maybe it's 0 to 10%? Going below 10% doesn't help, already in min bracket? Probably over thinking it.
Yes. When calculating DTI for credit card CLIs and applications, the minimum payments that show up on your credit reports are what you need to add up. Some lenders will ask if you pay rent instead of a mortgage and then add that to your minimum payments as well. When applying for a mortgage, you will also need to include things like HOA and property taxes but not utilities.
Each lender will set thresholds (brackets) for acceptable DTIs. Lower DTI is less risky, so keep it as low as reasonably possible. Less than 10% is probably a good goal for your best approval conditions.
@FicoMike0 wrote:I'm going to check my reports anyway. I'll try to minimize util and dti. I'm going to look at when wells does sps, so I'll know what cr version they have on file when I ask for cli. Thanks for the help.
You're welcome! I think you have a good plan going forward. Monitoring soft pulls through Annual Credit Report should help to determine which data sets are likely to be used. Best wishes for your upcoming CLI request and application.