You may have heard of the debt-to-income ratio (DTI) and considered its importance. In this article, we will define the debt-to-income ratio, analyze its significance, and consider five ways to improve your DTI.
What is a debt-to-income ratio?
The debt-to-income ratio is a metric used to evaluate the extent to which an individual is burdened or overburdened with debt. It is calculated by dividing your total monthly debt payments by your gross monthly income and multiplying the result by 100.
What’s a good DTI range and why does it matter?
A good DTI will generally be lower than 36%. A moderate DTI would fall in the 36%-43% range, while a high DTI is anything over 43%. A DTI over 50% is considered highly risky by lenders.
A lower DTI is important because it may give you access to more financial products and services. It may allow you to obtain more favourable loan terms as well as make you more likely to qualify for a mortgage. Lenders typically look closely at your DTI in order to determine your level of creditworthiness and whether you are a higher-risk borrower or a lower-risk borrower. This determination will assist the lender in making their lending decisions.
5 tips to improve your DTI
Keeping in mind the benefits that come with a lower DTI, let’s look at five ways to improve this metric.
1. Pay off your highest-interest debt
It almost goes without saying that paying down your highest-interest debt will likely result in a lower DTI. Getting rid of the most expensive debt will help lower your monthly debt payments, which may increase the amount of income you can devote to other expenses such as debt repayment or savings.
2. Debt consolidation
If you combine multiple different debts into a single monthly payment, you may not only obtain a lower overall interest rate but also simplify and reduce your overall debt load, resulting in a lower DTI.
3. Raise your income
Increasing your income, whether by obtaining a higher-paying job or earning a promotion at your current job, will likely increase the amount of income you have relative to the amount of debt you carry. This will likely lower your DTI and may help increase your overall creditworthiness.
4. Avoid taking on additional debt
Taking on new debt will most probably increase your debt-to-income ratio, assuming your income stays the same. Do what you can to avoid taking on new debt and do your best to pay off your existing debt. These actions may help improve your performance in this important financial metric.
5. Cut unnecessary spending
Reducing unnecessary spending will allow you to allocate more income toward debt repayment, thereby speeding up the process of paying off your debt. This, in turn, may result in a lower DTI.
Conclusion
In this article, we’ve explored the meaning and importance of your debt-to-income ratio, the good range to be in for this metric, and different ways potentially to improve your DTI. Given life’s ups and downs, you may be facing unexpected expenses. If you need to bridge a gap in cashflow, apply for a personal loan via Friendly Lender. We don’t check your credit score or credit report during our simple and quick online application process. To monitor your credit score and automatically detect errors on your credit report, sign up for Credit Verify today. The registration process takes only a few minutes!
