Do Credit Bureaus Use a Debt to Income Ratio?

Credit reporting agencies gather information relating to your credit accounts and debt management and use that information to compile your credit report. Credit bureaus do not use debt-to-income ratios. Debt-to-income ratios are tools used by lenders when underwriting loans and are not part of a credit report. However, your lender uses your credit report to help calculate your debt to income ratio.

Debt-To-Income Ratios

Lenders use debt-to-income calculations to determine how much money you can reasonably afford to borrow. DTI ratios work on the premise that at least 50 percent of your gross income goes towards taxes and day-to-day expenses such as food and utilities. Generally, you cannot take on more debt if your current monthly debt payments amount to more than 40 or 50 percent of your gross income. If you took on debt payments in excess of this amount, you might have problems paying your bills and could default on your loan.

Credit Reports

Most creditors regularly report your credit account activity to the credit bureaus. Creditors provide credit bureaus with information that shows how much you currently owe and how much you are required to pay towards each debt on a monthly basis. By simply adding together all of the monthly payments on your credit report, your lender can calculate your total monthly debt payment. Lenders ask you to provide evidence of your monthly income, such as your most recent pay stubs, and then calculate your debt-to-income ratio by dividing your total debt into your gross monthly income.

Reporting Requirements

Any reports given to the credit bureaus by your creditors must contain accurate information. Legally, your creditors are not actually required to make reports to the credit bureaus, and because it costs money to file reports, some lenders do not report to the bureaus at all. Consequently, your lender uses information on your credit report in conjunction with information that you must provide about any debts you have that are not showing up on your credit report. Lenders can only accurately calculate your DTI ratio if you provide this information.

Considerations

Credit bureaus do not use debt-to-income ratios because credit bureaus are not concerned with your cash flow. However, the Credit CARD Act of 2009 states that credit card issuers must attempt to verify your DTI ratio before issuing you with a credit card. Previously, credit card companies did not have to calculate your DTI. In order to help card issuers comply with this act, some credit bureaus now offer DTI reports on consumers. The reports are based on estimates of the consumer's income rather than actual facts, but these estimates comply with the provisions of the law. Therefore, while credit bureaus still do not use DTI ratios, some of the bureaus now produce DTI ratio reports.