How to Lower Your Debt-to-Income Ratio: Simple Tips for Financial Success

Increase your chances of securing loans with favorable terms!

Debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying off your debt Lenders use your DTI ratio to decide if they should lend you money.

In case your ratio is too high, it might be more complicated to get approved for loans, mortgages or also new credit. But don’t worry! There are many ways you can lower your DTI ratio, and we’ll show you how to do it.

Figuring out your DTI is the first step in understanding your financial health and whether you need to make any changes to your debt situation.

How to Calculate Your Debt-to-Income Ratio

To find your DTI, you need to know your total monthly income before deductions, as well as the monthly payments you make towards any outstanding debts. Let’s break it down:

1. Identify Your Gross Income: This is your income before any deductions, like taxes or retirement contributions.
2. List Monthly Debt Payments: Add together all of your monthly debt payments, such as rent or mortgage, car loan, student loan repayments, and credit card minimum payments.
3. Perform the Calculation: Divide the total of your debt payments by your gross monthly income.
4. Convert to Percentage: Multiply the result by 100 to express it as a percentage.

You can use the following formula:

DTI = (Total Monthly Debt ÷ Total Gross Monthly Income) x 100

For example, if you earn $4,000 per month and have $1,200 in debt payments (think mortgage, credit cards, student loans), your DTI would be:

DTI = (1200 ÷ 4000) x 100 = 30%

This means that 30% of your income is going toward debt payments.

Why Does Your DTI Matter?

A lower DTI means you’re managing your debt well, which makes you look like a less risky borrower. A higher DTI signals that you might be stretched too thin financially, which could make it harder to get approved for new credit or loans.

What’s a Good DTI Ratio?

A good DTI ratio depends on your goals and the lender’s requirements, but in general:

• A DTI ratio under 36% is considered good.
• A DTI between 36% and 43% is acceptable for many lenders, especially for mortgages.
• A DTI above 43% is considered high and may limit your ability to take on additional debt.

For example, when applying for a mortgage, many lenders like to see a DTI ratio under 36%, but some will go as high as 43% depending on other factors.

How to lower your debt-to-income ratio

There are a few ways to lower your DTI and boost your financial health:

Pay off high-interest debt first

Start by tackling your high-interest debts, like credit cards. The quicker you pay them off, the less you’ll pay in interest, which helps lower your DTI.

Refinance loans for better rates

If you’ve got loans like student or car loans, try refinancing for a better rate. It’ll lower your monthly payments and save you money in the long run.

Consolidate your debt

If you have multiple debts, consider consolidating them into one loan. It usually comes with a lower interest rate and makes your monthly payments more manageable.

Avoid adding more debt

While you’re working to lower your DTI, try to avoid taking on new debt. New credit cards or loans will only add to your monthly payments and slow your progress.

Negotiate with your creditors

Reach out to your creditors and see if you can get a lower interest rate or more flexible payment terms. It can help reduce what you owe each month.

How long will it take to improve your DTI?

The time it takes to lower your DTI depends on how much debt you have and how aggressively you pay it off. If you follow the strategies above and stick to your plan, you might start to see improvement in just a few months.

The key is consistency—if you keep making small changes to reduce your debt and increase your income, your DTI will improve over time. The best part is that you’ll also be on your way to stronger financial health.

Escrito por

Everaldo Santiago