Could your debt be affecting your financial wellbeing? There are ways to lower you debt-to-income ratio into a more manageable level.
One of the foundations of financial wellness is holding on to little to no debt. But sometimes debt is necessary because it’s a result of buying your dream home, financing your transportation to and from work, and paying for your education. But how do you know if your debt has gotten out of control?
That’s where the debt-to-income ratio steps in. It measures if you have too much debt compared to your income. The ratio allows lenders and yourself to figure out if you can afford additional debt payments. If you’re applying for a loan with excellent credit but really high debt-to-income ratio, you’ll most likely get denied.
What is the debt-to-income ratio? Also referred to as DTI, it’s a ratio that compares your monthly debt expenses to your monthly gross income. It helps lenders determine your ability to repay the debt with other outstanding debts you may have. You can learn how to calculate your DTI ratio here.
Do you have a high debt ratio? Or simply want to lower it? There are generally two ways to lower your debt-to-income ratio: pay off debt or increase income.
Here are some creative ways to lower your DTI.
Pay off debt
Paying off debt is the fastest way to lower your debt-to-income ratio. Once debt is paid off, you no longer have the minimum monthly payment. With credit card debt, choose a repayment strategy such as debt-snowball or debt-avalanche methods. Additionally, when choosing to pay off debt in relation to DTI, you may want to target debt with the highest monthly payments first.
Ask for a pay raise
A sure fire way to lower your debt-to-income ratio is by increasing your income. A small salary increase can drop your ratio low enough to be approved for a loan. Set a time and date to discuss your salary with your manager. Here’s a tip: determine how much more you need to make in order to get your DTI at a desirable level. Use that calculation to help you figure out how much to ask for.
Make extra income
Get a side hustle or sell unused items. Money earned from a side hustle like ride-sharing or food delivery can be included as income. And if you decide to sell items on Facebook marketplace, you can use that extra cash towards debt repayment. Learn more creative ways to make extra cash.
Pay more towards credit card balances
Because installment loans have fixed payments, you’ll want to target credit card balances with extra payments. Do what you can to lower the balances which will lower the minimum monthly payments along the way.
Negotiate to lower your interest rates
Sometimes there’s a catch 22. You want to apply for a consolidation loan but can’t get approved because your DTI is too high. Unfortunately, some lenders will use your current ratio and not factor the change after a consolidation. So, you’ll need to negotiate with your credit card companies and lenders instead. If you’re successful, a lower APR can mean lower payments.
Consolidate your credit cards
If you’re in a good financial situation, consider consolidating multiple credit cards. A consolidation loan may have a lower APR and reduce the total monthly payments.
Transfer credit card balances
A 0% balance transfer promotional cards means you can pay off your balances faster. Since the APR is zero for a period of months, your payments will go directly to the principal balance.
Refinance existing loans
By refinancing, you can potentially get a lower rate and better term lowering the monthly debt payments. List all your large debts and contact the lenders. Ask them what options are available. For example, you might be able to refinance student loans thus lowering your payments.
Reduce your expenses
Cut back on non-essential spending if your goal is to lower your debt-to-income ratio. Use the money towards debt repayment. The more money you can put towards debt the faster you can improve your DTI ratio. Learn how to lower your monthly expenses.
In summary, the reason you want and should lower your DTI is to improve your financial security. The less debt you hold the better you’ll feel. Understandably, there may be times when your ratio is higher because you have a mortgage or still paying off student loans. However, knowing and tracking your DTI can help you focus on a better path to debt freedom.