How to Fix Your Debt-to-Income Ratio [5 Tips From Our Experts]

Navigating financial challenges can often feel overwhelming, but understanding and managing your debt-to-income ratio (DTI) is a pivotal step toward regaining control. This crucial financial metric compares your debt to your overall income, highlighting how much of your earnings go toward paying off debts each month. A lower DTI enhances your loan eligibility and reflects a healthier financial status.

Learn more about DTI below and discover how to fix your debt-to-income ratio using five tried-and-true strategies.

Understanding Your Debt-to-Income Ratio

Your debt-to-income ratio is more than just a number. It’s a vital snapshot of your financial well-being. This ratio compares your total monthly debt payments to your gross monthly income, revealing how much of your earnings are allocated toward debt repayment.

A lower ratio signifies greater financial flexibility and stability, essential for obtaining favorable terms on loans and credit. This is especially helpful when seeking credit outside of high-interest payday loans. Fortunately, a poor debt-to-income ratio can be fixed, and you can learn how to improve your debt-to-income ratio and take steps to get started.

How to Calculate Your Debt-to-Income Ratio

Calculating your debt-to-income ratio is straightforward and only takes a couple of minutes. To determine your DTI, divide your total monthly debt payments by your gross monthly income. For example, if your monthly debts (including loans, credit card payments, and other financial obligations) amount to $1,500 and your gross monthly income is $4,500, your DTI would be 33.3%.

What Is an Acceptable Debt-to-Income Ratio?

An acceptable debt-to-income ratio depends on the lender and the type of credit you seek. However, a general rule of thumb is to aim for a debt-to-income ratio of 36% or lower. This threshold is especially crucial for potential homeowners, as a DTI below 36% is a common eligibility requirement for more favorable terms.

Lenders may allow higher ratios for other types of loans, such as personal and auto loans. However, maintaining a lower DTI is advisable whenever possible, as it indicates a healthy balance between debt and income and makes you less risky to lenders.

If your debt-to-income ratio is higher than 36%, or if you’d like to improve it further, learn how to decrease your debt-to-income ratio in the sections below.

5 Best Ways to Fix Debt-to-Income Ratio

If you want to learn how to fix your debt-to-income ratio, you’ve come to the right place. You can improve debt-to-income ratios through several tried-and-true strategies. Here are five ways you can work toward fixing your DTI:

1. Focus on Debt Reduction

Decrease your debt-to-income ratio by focusing on reducing your debt. Avoid taking out new loans and dedicate more of your budget to paying off debts, especially those with higher interest rates. With each payoff, you can drastically reduce your monthly obligations. You can also consider using snowball or avalanche strategies, which focus on paying off smaller debts first or debts with the highest interest rates, respectively.

2. Consider Debt Consolidation or Debt Settlement

Debt consolidation and debt settlement strategies offer unique pros and cons, which can help you reduce your debt-to-income ratio over time. Combining multiple debts into a single loan with a lower interest rate through debt consolidation can simplify your payments and reduce the amount spent on interest.

Alternatively, debt settlement allows you to negotiate with creditors to pay a lump sum less than the total amount owed, which can quickly decrease your DTI. However, it’s important to be aware of potential downsides, such as extending the loan term, which can mean paying more in total interest over time. Additionally, debt settlement may decrease your credit score and have risks such as potential fees and penalties.

3. Explore Additional Revenue Streams

Increasing your income through side jobs, freelance work, or raises can effectively improve your debt-to-income ratio by increasing the income part of the DTI equation. More income also provides greater leeway in your budget to address existing debts and accelerate your path to a healthier financial state.

4. Lower Your Monthly Payments

Negotiating lower monthly payments through refinancing or restructuring your debt terms can reduce how much you owe each month. This adjustment helps improve DTI by freeing up more of your income to be used elsewhere in your budget or to pay down debts faster.

5. Enroll in a Debt Management Plan

Enrolling in a debt management plan offers a structured way to deal with substantial debt, typically from credit cards, payday loans, and personal loans. By consolidating your debt payments into one monthly installment at a reduced interest rate, you can often pay off your debt faster than managing it on your own.

At Debt Reduction Services our certified counselors work directly with you to negotiate with creditors over eligible debts, ensuring that your repayment terms are manageable and tailored to your financial situation. Our personalized approach helps you understand and navigate the process with confidence.  If you’re feeling overwhelmed by credit card debt, call Debt Reduction Services at (866) 688-3328 to speak with an expert counselor about whether a debt management plan is the right strategy for you. There’s no minimum debt burden to qualify, making our services highly accessible for anyone seeking financial relief.

Debt-to-Income Ratio FAQs

What If My Debt-to-Income Ratio Is Too High?

If your debt-to-income ratio is too high, it’s crucial to address your DTI immediately. Begin by reassessing your financial plan to identify areas where you can trim expenses and allocate more funds toward debt reduction or find strategies that may work best for your finances. High DTIs can make it more challenging to qualify for loans or leave you with less favorable loan terms.

Does Lowering Your Debt-to-Income Ratio Raise Your Credit Score?

Although lowering your debt-to-income ratio doesn’t directly affect your credit score, it indirectly benefits it by decreasing your overall debt levels. This reduction can improve your credit utilization ratio, a significant factor in credit scoring, leading to a better credit score over time.

Can I Improve My DTI Without Increasing My Income?

Yes, improving your DTI without higher income is possible by reducing your debt. Making extra payments, particularly on high-interest debts, and cutting unnecessary expenses are effective strategies to help you decrease your monthly obligations and improve your DTI.

How Quickly Can I Realistically Lower My Debt-to-Income Ratio?

You can see noticeable improvements to your debt-to-income ratio within a few months if you take deliberate steps like increasing your income, paying more toward your debt, or enrolling in a debt management plan.

What Should I Do If My Efforts to Improve My DTI Aren’t Working?

If your attempts to lower your debt-to-income ratio are unsuccessful, it can be beneficial to seek professional advice. A financial counselor from Debt Reduction Services can offer personalized strategies and solutions you might have yet to consider, such as a debt management plan.

Empower Your Financial Journey

Now that you know how to fix your debt-to-income ratio, it’s time to create a strategy that suits your financial needs. As you continue your financial journey, remember that improving your debt-to-income ratio is a significant step toward stability.

Fortunately, you don’t need to walk this journey alone. Debt Reduction Services provides expert guidance and support. Whether you have questions about your options, want to enroll in a debt management plan, or are concerned about enrollment eligibility regarding credit scores or other criteria, we are just a call away. Call Debt Reduction Services at (866) 688-3328 if you need additional support or personalized guidance.