6 Ways to Lower Your Debt-to-Income Ratio: Strategies that Work

A high debt-to-income ratio (DTI) can be a significant obstacle when it comes to getting approved for a mortgage or a car loan. If you’re struggling to get your debt to income ratio down, you’re not alone. A growing number of Americans are in the same boat. 

One of the most important things to understand when you’re trying to get a handle on your finances is your debt-to-income ratio (DTI). This simple calculation will give you a good idea of whether you’re in over your head with debt or if you’re doing a pretty good job of keeping it under control. 

In this blog post, I will discuss six ways that you can lower your debt to income ratio and get back on track financially.

What is Debt-to-Income Ratio?

The debt-to-income ratio is a percentage of how much total debt you have compared to how much money you make. It’s not just about how much you owe but also about how much money you make. 

Your debt-to-income ratio is a key number because it’s one of the elements lenders look at when they are determining whether to give you a loan. Lenders often look at your debt-to-income ratio when considering you for a loan because it helps them determine if you can manage additional monthly payments and how likely you are to repay a loan on time.

That’s why it’s good to know what yours is before you apply for a mortgage or other type of loan. A higher debt-to-income ratio means you’re dedicating more of your budget to debt payments, which can make it harder to qualify for a loan or get a favorable interest rate. 

How to Calculate Your Debt-to-Income Ratio

To determine your debt-to-income ratio, simply take your total monthly debt payments and divide them by your total monthly gross income. For example, let’s say you make $3,000 per month before taxes and have $1000 in debt payments. Your debt-to-income ratio would be: 1000 / 3000 = 0.33. In other words, 33% of your income is going towards debt repayment each month. 

Most experts recommend keeping your debt-to-income ratio below 36%, so in this case, you would be well within that threshold. However, if your debt-to-income ratio is getting close to or even over 36%, it’s time to take a hard look at your spending and see where you can cut back in order to get it under control. Reducing your debt is one of the most important things you can do for your financial health. 

Ways to Lower Your Debt-to-Income Ratio

1) Use a Balance Transfer

One way you can lower your debt-to-income ratio is by using a balance transfer on your credit cards. This essentially means transferring the balance of one credit card to another credit card with a lower interest rate. This can save you money on interest payments and ultimately help you pay off your debt faster. 

Additionally, by lowering your monthly payments, you can free up some extra cash each month to put towards paying down your debt. If you’re struggling with high monthly credit card payments, a balance transfer could be a great option for you.

2) Pay Off High-Interest Debts

Another way you can lower your debt-to-income ratio is by paying off your high-interest debts. This will reduce the amount of money that you owe in interest, and it will also free up more of your income to put towards other debts. 

To find out what your high-interest debts are, you can look at your credit report or ask your lender. Once you know which debts are costing you the most in interest, you can focus on paying those off first. You may need to make some sacrifices in order to free up more money to put towards your debts, but it will be worth it in the long run. By lowering your debt-to-income ratio, you’ll be in a better financial position and you’ll be able to allocate more of your income towards other goals.

3) Refinance Your Debt

If you have student loans, a mortgage, or any other type of loan, refinancing them with another lender is a great way to lower your debt-to-income ratio.

Refinancing simply means taking out a new loan to pay off an existing one. This new loan will ideally have better terms than your old one, which can help lower your monthly payments and save you money in the long run.

4) Cut Back on Non-Essential Expenses

When it comes to debt, most of us focus on the big things: mortgages, car loans, and credit card bills. But what we often overlook is the impact of our everyday spending habits on our overall debt-to-income ratio. 

Those little expenses – the coffee runs, the impulse purchases, the streaming subscriptions – can really add up. And if your debt-to-income ratio is already high, cutting back on non-essential expenses and putting that money toward paying down debt can make a big difference. 

Not only will you save money in the short term, but you’ll also be in a better position to repay your debts and improve your credit score. So next time you’re tempted to splurge, think about how it will impact your debt-to-income ratio and your financial health in general.

5) Consolidate Your Debts

Consolidating your debt can be a helpful way to lower your ratio and make yourself a more attractive borrower. When you consolidate, you combine multiple debts into a single payment. This can help to simplify your finances and free up some of your monthly income to put towards other expenses. 

In addition, consolidating your debt can sometimes lead to lower interest rates, which can save you money over time. For these reasons, consolidating your debt is often an effective way to lower your debt-to-income ratio and improve your chances of securing a loan.

6) Find a Way to Increase Your Income

There are a lot of benefits to increasing your income, and one of them is that it can lower your debt to income ratio.

Whether you ask for a raise at work or find a side hustle, increasing your income will benefit your debt-to-income ratio.  

Final Thoughts

Debt-to-income ratio is a crucial financial health indicator that you should keep an eye on. It can determine the interest rate at which lenders lend to you. It’s also a useful tool to help you identify if you are taking on too much debt. 

If you see your money disappear toward credit card payments and loans, you need to take steps to reduce your debt and increase your income.