A high debt-to-income (DTI) ratio is one of the biggest reasons why many loan applications get rejected. Lenders use the DTI ratio to assess a borrower’s ability to manage loan repayments. If your debts are too high compared to your income, lenders may consider you a risky borrower, even if you have a good credit score.
But how exactly does a high debt-to-income ratio affect your credit score? More importantly, what steps can you take to lower your DTI and improve your financial health?
This blog will explore how DTI impacts your credit score, loan eligibility, and financial standing, along with expert tips from RupeeQ on how to manage and reduce it effectively.
Understanding Debt-to-Income Ratio and How It’s Calculated
The debt-to-income ratio (DTI) is a simple percentage that represents the portion of your monthly income that goes towards debt repayment. It helps lenders determine if you have enough income to handle additional debt.
How to Calculate Your DTI Ratio
DTI Ratio=(Total Monthly Debt Payments/Total Monthly Income)×100
For example, if you earn ₹1,00,000 per month and your total loan EMIs amount to ₹40,000, your DTI ratio is:
(40,000÷1,00,000)×100=40%
DTI Ratio Ranges and Their Meaning
| DTI Ratio | Impact on Loan Eligibility | Risk Level |
| Below 20% | Excellent – High chance of loan approval | Low risk |
| 20% – 35% | Good – Loan approval possible | Moderate risk |
| 35% – 50% | Caution – Lenders may hesitate | High risk |
| Above 50% | Poor – High chance of loan rejection | Very high risk |
RupeeQ Tip: Ideally, your DTI should be below 35% to get loan approvals at lower interest rates. If it’s higher, work on reducing existing debts before applying for new credit.
How a High Debt-to-Income Ratio Affects Your Credit Score
Even though the DTI ratio itself does not directly impact your credit score, its effects can lead to actions that lower your score. Let’s look at how:
Higher Chances of Loan and Credit Card Rejections
Lenders check your DTI ratio before approving loans. A high ratio reduces your approval chances, even if your credit score is good. Frequent rejections can force you to apply for loans with high-interest rates, further increasing your debt burden.
Increased Credit Utilization Hurts Your Score
When you rely on credit (loans, credit cards) to manage expenses, your credit utilization ratio increases. A high credit utilization ratio (above 30%) lowers your credit score.
Example:
Neha’s monthly income is ₹80,000, and she has credit card limit of 5 Lakhs but a credit card bill dues of ₹3,00,000. Since her credit utilization is above 50%, her credit score dropped from 760 to 690 within six months.
Late Payments and Defaults Become More Likely
With a high DTI, you may struggle to keep up with multiple EMIs, increasing the risk of:
- Late payments, which reduce your credit score.
- Loan defaults, leading to severe damage to your credit history.
Example:
Raj’s DTI was 55%, and he missed two EMIs. His credit score dropped from 740 to 670, and he faced difficulty getting a personal loan later.
RupeeQ Tip: If your DTI ratio is above 50%, focus on paying off high-interest loans first. Consider a loan balance transfer to a lower interest rate using RupeeQ’s loan comparison tool.
How to Reduce a High Debt-to-Income Ratio
Pay Off Existing Debts Faster
Lowering your total debt is the most effective way to reduce your DTI ratio. Prioritize clearing:
- High-interest loans (credit card bills, personal loans).
- Loans with short repayment terms.
Increase Your Monthly Income
If your income increases while your debt remains the same, your DTI ratio automatically improves. Consider:
- Freelancing or side gigs to boost income.
- Negotiating a salary hike at work.
Example:
Riya had a DTI of 45% due to her ₹40,000 loan EMI. She took up a freelance job, increasing her income from ₹90,000 to ₹1,20,000, reducing her DTI to 33%.
Refinance or Transfer Your Loans to Lower Interest Rates
A loan balance transfer allows you to shift an existing loan to a lender offering lower interest rates, reducing your EMIs.
Example:
Vikas had a personal loan of ₹6 Lakhs at 16% interest. He transferred it to a new lender offering 12% interest, reducing his EMI by ₹2,000 per month and lowering his DTI.
How to Do It:
Compare loan balance transfer options using RupeeQ platform and apply for a lower-rate loan without impacting your credit score.
Avoid Taking New Loans Until Your DTI is Lower
If your DTI is already above 40%, avoid applying for:
- Credit cards with high limits
- New personal loans
- Buy Now Pay Later (BNPL) schemes
Example:
Amit wanted to buy a car but had an existing home loan and high credit card dues. By postponing his car loan for 6 months, he paid off ₹1 Lakh debt, reducing his DTI to below 35% and improving his loan eligibility.
Consolidate Your Debt for Easier Repayment
If you have multiple high-interest loans, consider consolidating them into a single loan with a lower interest rate.
Example:
Sneha had three personal loans with different EMIs. She took a consolidation loan with a longer tenure, reducing her DTI from 48% to 35%, making repayment easier.
Final Thoughts
A high debt-to-income ratio can make loan approvals difficult and hurt your credit score in the long run. To keep your finances in check:
- Maintain a DTI ratio below 35% for better loan approvals.
- Pay off high-interest loans first to reduce financial stress.
- Consider a loan balance transfer to lower your EMI burden.
- Increase your income through side jobs or freelancing.
By taking smart financial steps and using RupeeQ’s credit monitoring tools, you can lower your DTI, improve your credit score, and qualify for better financial opportunities.
