Practical ways to lower your debt-to-income ratio

Why does my DTI matter?

A lower DTI ratio indicates that you have enough money coming in to handle taking on another regular payment.

The ideal DTI is 36%, according to the Consumer Protection Finance Bureau. Some lenders will consider you for a loan with a ratio of 43%, but generally no higher than that.

If you’re looking to get the best mortgage rate, a personal loan or new credit card, your DTI will be one of the top factors lenders will consider.

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How can I lower my DTI ratio?

If your ratio is slightly (or significantly) higher than the ideal percentage, you may want to consider lowering it before you apply for a new loan.

Like credit scores you don’t have to just live with a less-than-perfect number.

There are some tangible, straightforward actions you can take today to improve your borrowing capacity.

1. Pay off your loans early

When you take out a loan, generally it will have a fixed interest rate and a fixed term over which you’ll be expected to repay what you borrowed.

If you’ve had the loan for a while, you’ve probably been making your monthly payments without thinking much about it. But if you can afford to pay off your loan early, adding a few extra dollars to your payments is a good idea.

One thing you’ll want to watch out for is whether your loans have prohibitively large prepayment penalties.

More: Take a break from your debt this month with the help of Credible

2. Focus your payments

Look at everything you owe and come up with a payment strategy.

If you’re managing a few debts, you can tackle what you owe in two ways.

You could use the avalanche method and address the debts with the highest interest rates first — which will save you the most money in the long run — or use the snowball method to knock off the smallest ones first and work your way up to the bigger loans.

And as we mentioned before, think about which options will allow you to reduce your DTI but still avoid racking up prepayment penalties, fees or increased interest rates.

3. Negotiate longer loan terms

If you don’t have the cash to pay off your loan faster, you may consider asking your lender to tack on some time to the term instead.

This way, you can reduce your monthly payments which should then nudge your DTI down.

However, this approach doesn’t work for everyone: be careful to read the terms carefully and ensure you’re not going to significantly increase your interest rate in exchange for a longer term. That can result in you having to pay even more money over the life of the loan.

4. Tighten your household budget

Even if you’re not planning to buy a new car or take out a new loan, you should cut back on the small expenses that add up too.

Living on a tight budget doesn’t have to feel like a punishment. While many households have cut their entertainment budgets during the pandemic, there are still ways you trim costs even more:

• For family pizza night, make your own pizzas instead of ordering in.
• Get a library card and borrow books and movies instead of buying them.
• Reduce your video streaming subscriptions.
• Use a free browser extension to help you save when you do need to buy something.

When you’re thinking about lowering or maintaining your DTI ratio, you’ll want to avoid making any big purchases.

Especially if you’re looking at getting a mortgage, now is not the time to buy a new car, apply for a new credit card or start a home renovation project.

Even if you can realistically afford it, taking on a new debt or adding to your credit card balance will only drive up your DTI. Hold off on pulling the trigger on any purchases for now.

5. Avoid new debt/big expenses

When you’re thinking about lowering or maintaining your DTI ratio, you’ll want to avoid making any big purchases.

Especially if you’re looking at getting a mortgage, now is not the time to buy a new car, apply for a new credit card or start a home renovation project.

Even if you can realistically afford it, taking on a new debt or adding to your credit card balance will only drive up your DTI. Hold off on pulling the trigger on any purchases for now.

6. Bring in more income

Most of the recommendations we’ve made have to do with lowering your debt, but increasing your income is another way to improve your DTI.

If a promotion or salary bump isn’t an option at your workplace, there are even ways you can make money without a job like renting out your house through AirBnB.

Or if you have a talent or interest that you can monetize, you might think about creating an account on an online marketplace for gig work to start profiting from your passion.

More: Want to invest your spare change but don't know where to start? There's an app for that

7. Consolidate or refinance your debt

If you have a bunch of debts at different interest rates and due on different days of the month, lumping them all together may make it easier for you to manage them.

One option would be a balance transfer credit card with a 0% APR rate. Dumping all your high-interest loans into a single payment can help you clear it out faster.

As we’ve mentioned, interest rates play a huge part in how much you end up paying to borrow money. You can apply for a debt consolidation loan with a better interest rate, that can help speed up the process of paying down your debt (and lowering your DTI).

This is helpful when you’re looking at managing your student and auto loans. One helpful option is to refinance your student loans.

And of course if you already have a mortgage, now is an excellent time to refinance your loan.