How to improve the debt-to-income ratio
Lowering your debt ratio improves your credit rating and increases your chances of qualifying for a mortgage. It will also help you get a better interest rate on your mortgage. Fortunately, there are different ways to improve your debt ratio.
Determine where you spend your money
Track your spending for a week or two. In addition to making you more attentive to your spending, spending tracking will help you identify any follies that are racking up too many exits.
Identify the places where you can cut back (be realistic!) Because you will need the extra money to reduce your existing debt payments.
Make a plan to reduce existing debt
Reducing your debt-to-income ratio is all about reducing your existing debt. There are two common methods of paying off debt:
- The Debt Snowball Method: Pay off your smallest debt first and work your way up to the biggest.
- The Debt Avalanche Method: Pay off high-interest debt first.
Since the debt-to-income ratio calculates the total monthly payment obligations and most installment loans have fixed monthly amounts whether or not you pay extra (like a car loan or a student loan, for example) , it may be wise to pay off smaller debts. first in order to get those recurring monthly payments “off the books”.
Regardless of how you choose to pay off your debt, the bottom line is the same – paying off debt not only saves money on interest, but also lowers your DTI.
Avoid adding new debt
While you are paying off your current debt, don’t take on any new debt. Even if you aren’t using a new credit card, asking for a new one will be a wake-up call to lenders.
There is one exception: the balance transfer offer. If you can qualify for a credit card with an extremely low introductory rate (or even 0%), it may be worth requesting and transferring your higher interest balances to it.
The lower interest rate will allow you to pay off your debts faster, because most of your payment will go to pay off the balance rather than paying interest. Keep in mind that for this to work from a DTI perspective, you need to officially close your other credit accounts and stick to your repayment plan.
Pay more than the minimum
Whenever you have debt, if you can afford to pay more than the minimum, it will help reduce the actual loan balance. By paying only the minimum, you are only covering the interest on the loan and thus your total debt does not go down. Plus, paying more than the minimum helps improve your credit rating and minimize interest charges, too.
Find ways to make debt cheaper
When you are paying off debt, the object of the game is to make your debt as cheap as possible. If you have high interest credit card debt, try to find cheaper alternatives, such as:
- The balance transfer offer mentioned above.
- Ask your current card companies / debtors for a lower interest rate.
- If you already own a home, you may want to consider a refinancing of collection at consolidate debt.
- Make a request for Personal loan with a fixed repayment schedule to consolidate debt at a lower interest rate.