Tips to Lower your Debt-to Income Ratio

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By CraigNewby

What is the debt to income ratio?

DTI calculates the amount you owe relative to your income. This is a simple way for potential lenders to determine how much debt you have and to decide if they can lend more. Share information about these topics: Bad credit finance, home equity loan and Personal loan.

How to calculate DTI

It is easy to calculate your DTI. Simply add your monthly debts to your monthly gross income. This is the amount you make before taxes. Add these things to your debts when adding them up:

  • Rent or mortgage payments
  • Auto loan payments
  • Payments by credit card
  • Personal loans payments
  • If you pay the monthly fees for your Homeowners Association (HOA),
  • Child support or Alimony payments

You will notice that the debts you are adding up to your monthly payments eventually will be paid off. You should not include utility bills, charitable donations, daycare or groceries.

Let’s assume you make $6,000 per month before taxes and have $2,500 in monthly debt. Divide $2,500 by $6,000 to calculate your DTI ($2,500 / $6,000 = 0.41166). This yields a result of 41.6% which is nearly 6% more than the “ideal”.

Here are five ways to reduce your DTI if you find that it is higher than 36% or if you have a healthy DTI.

There are ways to lower your DTI

Reduce high balances

Your DTI will increase the more debt you have. Look at all of your debts to determine which one has the highest balance. You’ll be closer to paying off that debt if you start chipping away at it. Your DTI will also decrease with each payment.

Lower interest rates on debt

You can pay off your debt faster if you have a lower interest rate. There are many ways to reduce your interest rate. First, call your lender to request a reduction in your rate. If you have been working with the same financial institution for years, they may be familiar with your payment history and will likely lower the rate if you are a loyal customer.

You can also consolidate higher-interest debt to a single personal loan at a lower rate. Let’s say you have three credit card accounts with interest rates between 15% and 17%. You can save money by getting a personal loan at just 5%, paying off your credit card debt faster, and lowering your DTI.

Place credit cards on ice

Sometimes, the best thing to do is “stop.” You shouldn’t buy things just because you want them. Don’t give money away if you don’t have the funds to pay it off. Consider putting your credit cards on the ice if you find yourself using your credit card to pay for things that are not necessary. Some people find that freezing their credit cards in a block in the freezer gives them the time and space they need to stop making unnecessary purchases.

Use a “24-Hour Rule”

There are many proven ways to save money. This is testament to how many people have had to manage their finances. The 24-Hour Rule is one such way. Let’s suppose you go to a furniture shop with a friend. You see a buffet table that would be great in your dining area. You’ve seen it discounted many times before and are now ready to buy.

That’s okay. As you lower your DTI, you’ll find a lot of items that you like. Some of these things will be discounted. The 24-Hour Rule demands that you leave the store without buying anything, and that you think about the purchase for at least 24 hours before opening your wallet. Do you think it is worth getting deeper into debt? Is it worth trading a lower DTI to get a new buffet table.

Side hustles are a great way to make money.

Nobody wants to hear that they need to take on another job, especially if they are already struggling to make ends meet. We’ll be here for a while. There are many part-time jobs that you can do, and it is possible to find something that will make your heart sing. You can teach lessons to children if you are a musician (but not necessarily a professional). Teaching English to children from Asia is possible. You can also sell crafts you would normally give as gifts. It’s possible to make money doing what you love while making money. You can use these funds to reduce your debt and decrease your DTI.

Although lowering your DTI will take some effort and time, you’ll soon find that it is worth the effort. A low DTI will increase your chances of having financial resources available when you need them. This can help you sleep better at night.