How to Improve Your Debt-to-Income Ratio
Your debt-to-income ratio is a key factor that many lenders use to evaluate your credit-worthiness. Watch to learn how to improve yours.
Your debt-to-income ratio is a key factor that many lenders use to evaluate your credit-worthiness. Learn what else lenders consider that may not appear on your credit report.
Video Transcript
Debt to income ratio, also known as DTI, measures how much debt you have each month compared to how much money you earn. It's one of the factors many lenders use to evaluate your ability to manage your debt and your monthly payments. The lower your DTI, the stronger your financial health and the less risky you appear to lenders.
So taking the steps to lower your DTI can show you're financially responsible. Wondering how to calculate your debt to income ratio? First, add up all your monthly debt. Next, divide that number by your total monthly income before taxes. The result is a percentage known as your debt to income ratio, or DTI.
DTI requirements vary depending on the type of credit you're applying for, and generally, staying under 40 percent is best. Looking for ways to lower your DTI? There are two ways. Pay down your debt or increase your income. For most of us, “Increase our income,” is easier said than done. If you really need credit, some lenders may allow you to apply with a co applicant or add a cosigner so that person's income is considered as part of your application, which may help you get approved.
Just remember, while this feature might help you get credit, you're not actually lowering your DTI. For the majority of us, the best route to lowering our DTI is focusing on reducing our debt. To start, Stop taking on more debt. Watch your spending and stop using your credit cards. Do whatever it takes.
Next, evaluate your options for lower rates and monthly payments. See if you can lower your credit card payments with a balance transfer or with a debt consolidation loan. Next, reevaluate your budget and figure out how you can reduce your spending for the long haul. Lastly, use that extra cash you're not spending to pay down your existing debts.
Improving your DTI can help you improve overall credit health and help you qualify for more affordable credit. So get started on paying down your debt and improving your credit health today.
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