How Credit Cards Affect Your Debt-to-Income Ratio
Credit card debt is one of the most common contributors to high DTI ratios. Understanding how lenders factor credit cards into DTI calculations can help you strategically manage your cards before applying for loans.
Minimum Payment, Not Total Balance
A common misconception: lenders use your minimum monthly payment — not your total balance — when calculating DTI. This is an important distinction:
- Credit card balance: $10,000
- Minimum payment: $200/month
- DTI calculation uses: $200 (not $10,000)
However, if no minimum payment is reported on your credit report, most lenders use 5% of the outstanding balance as the assumed monthly payment.
How to Reduce Credit Card Impact on DTI
- Pay off cards entirely: A $0 balance = $0 minimum payment = removed from DTI
- Pay down balances: Lower balances mean lower minimum payments
- Transfer to a lower-payment option: Balance transfer cards with lower minimums
- Don't close zero-balance cards: They don't affect DTI and help credit utilization
Credit Cards and Mortgage Applications
When applying for a mortgage, credit cards can be particularly impactful because even small minimum payments add up. Strategy: pay all credit cards to $0 before your mortgage application. Even if you continue using them for daily purchases, having a $0 statement balance means $0 is reported as your minimum payment.
Timing matters: Balances are typically reported to credit bureaus on your statement closing date, not your due date. Pay before the statement closes for the change to appear.
Credit Utilization vs. DTI
These are related but different concepts:
- Credit utilization: Percentage of available credit used — affects your credit score
- DTI: Percentage of income going to debt payments — affects loan qualification
High credit card balances hurt you both ways: they increase credit utilization (lowering your score) and increase minimum payments (raising your DTI). Paying down cards improves both metrics simultaneously.
The Best Strategy Before Applying for Credit
- Pay all credit card balances to $0 if possible
- If not, prioritize paying off cards with the highest minimum payments
- Time your payoff to occur before the statement closing date
- Wait one billing cycle for the $0 balance to report to bureaus
- Then apply for your new loan with improved DTI