Intro
Your debt-to-income ratio (DTI) is an important metric used to evaluate your debt burden relative to your income. It is measured simply by dividing your total monthly debt payments by your gross monthly income and multiplying the result by 100.
The optimal range
An excellent DTI does not exceed 25%, while a good DTI is considered to be below 36%. A moderate DTI ranges from 36%-43%. A high DTI is anything over 43%. Any value over 50% is considered to present a very high risk to lenders and may limit your options when it comes to financial products and services.
How to improve your DTI
There are many reasons why you might want to improve your DTI. You might have a higher chance of getting approved for a loan, obtain more favourable terms on a loan, get access to higher borrowing limits, attain a higher credit score, have a higher chance of qualifying for a mortgage, and more. Along with your credit score, your DTI is an important financial metric that basically reflects upon your creditworthiness, i.e. the level of risk you present to lenders as a prospective borrower. To check your credit score or catch mistakes on your credit report, sign up for Credit Verify! It only takes a few minutes.
Here are five tips to decrease your DTI and potentially improve your financial standing.
1. Pay down your most expensive debt
A key step to reducing your debt burden relative to your income is paying down your highest-interest debt. By paying off your debt, you will reduce your debt load, which will, in turn, lower your DTI and likely increase your creditworthiness. The two most popular strategies to pay off debt are the snowball method and the avalanche method. The avalanche method has you pay off your highest-interest debt first, followed by lower-interest debt. The snowball method has you start with your smallest debt and work your way up.
2. Increase your income
Another way to lower your DTI is to increase your income. This can be achieved by obtaining higher-paid employment or getting a raise where you currently work. To obtain higher pay, you may wish to consider upskilling, learning new skills online, or earning additional credentials. Upskilling simply refers to learning new skills or improving your existing ones to stay competitive in the ever-evolving job market. It may involve learning how to use new technology, learning about new industry trends, or participating in training programs, online courses, certifications, and the like.
3. Consider debt consolidation
Debt consolidation may allow you to combine multiple different debts into a single monthly payment, potentially at a lower interest rate. This could help reduce your total monthly debt payments relative to your income, leading to an improved DTI.
4. Don’t take on new debt
Taking on new debt will likely result in a higher DTI and lower creditworthiness. If you’re able to avoid taking on new debt, you may be able to decrease your DTI. If you need to take out a loan, minimize the number of loans you take out. Multiple ongoing loans are more difficult to pay off.
5. Reduce unnecessary expenses
By reducing your unnecessary expenses, you may be able to direct more of your income toward debt repayment, thereby reducing your overall debt load and lowering your DTI. Review your spending habits and consider what you can do without. Perhaps you have an expensive coffee habit. You may wish to make your coffee at home instead of going to large coffee chains. In this way, you can customize your coffee just the way you like it. Perhaps you have a habit of eating out. Consider cooking at home instead. This may lead to healthier eating habits and lower spending as well as improving your culinary skills. Review all of your expenses in a systematic manner and analyze where cuts can be made.
Conclusion
A lower DTI can benefit you by improving your creditworthiness and enabling access to various financial products and services, better loan terms, and more. The above tips should help you improve your DTI.
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