Financial Literacy

If you calculate your debt-to-income ratio and decide it is too high, or if you are unable to get approved for the amount you need, there are some things you can do to lower your debt-to-income ratio before you borrow money.

Reduce Your Debt and Expenses

One of the quickest ways to reduce your debt-to-income ratio is to reduce your monthly debt. You can accomplish this by increasing the amount of money you are putting toward paying off debt. Make sure you are making more than the minimum payment on as many debts as possible. This not only reduces the debt quicker but also saves you money over the long run in interest payments. If you can, make a double payment to outstanding debt balances to get those balances down as quickly as possible.

Another option is to reduce discretionary spending to make room in your budget for the extra payments to apply to debts. Try switching to cash only where possible because it is especially important to stop putting money on credit cards so that debt stops accumulating. If you get a windfall of any kind, use it to pay off debts.

If you have a large amount of credit card debt, consider consolidating that debt into one. When you consolidate credit card debt, you can usually get a lower interest rate, which will help reduce your monthly payments, freeing up some money that you can apply to the consolidated debt. This will help you pay down the debt quicker. If consolidation isn’t a good option for you, then be sure to pay off the debts with the highest interest rates first.

Increase Your Income

If possible, find creative ways to increase your income. Some ways to do this would be to work a little overtime, ask for a raise, take on a part-time job or turn a hobby into a side business. Increasing your income will help do double duty in reducing your debt-to-income ratio. Because of the calculations, the more you can increase your income, the lower your debt-to-income ratio will be. Moreover, you will be able to apply that extra income to your debts. This may be the more complicated option, depending on your situation, but it can be the most fruitful if you can make it happen.

If you need to calculate your debt-to-income (DTI) visit the Best Egg DTI calculator.


February 14, 2018


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