What is the Fastest Way to Raise Your Debt-to-Income Ratio?

Your debt-to-income (DTI) ratio is an important factor that lenders use to evaluate your ability to take on additional debt. A higher DTI ratio indicates you are already devoting a large portion of your income to debt payments which makes lenders less likely to approve you for new credit. Fortunately there are steps you can take to quickly improve this key ratio.

What Exactly is the Debt-to-Income Ratio?

The DTI ratio compares your monthly debt payments to your monthly gross income It is calculated by dividing your total monthly debt payments by your total monthly gross income

For example, if you have $2,000 in monthly debt payments and a gross monthly income of $5,000, your DTI is $2,000 / $5,000 = 0.4, or 40%.

In other words, 40% of your income is being used to cover your existing debts. The lower your DTI ratio, the better when it comes to qualifying for new loans and credit cards.

Why You Want a Lower DTI Ratio

Lenders prefer to see a DTI of 36% or less when reviewing mortgage applications. For other types of loans and credit cards, lenders generally look for a ratio of 50% or lower.

If your DTI is too high, lenders will view you as a riskier borrower who may have trouble managing additional monthly payments. You are less likely to get approved for the best loan terms and interest rates.

By lowering your DTI ratio you can improve your chances of qualification and access more affordable financing options.

Fast Ways to Reduce Your DTI

Here are some of the quickest methods to decrease your DTI ratio within a few billing cycles:

Pay Off Revolving Balances

One of the fastest ways to lower your DTI is paying off credit card balances. The minimum monthly payment on credit card debt is typically included in your DTI calculation.

By eliminating those revolving balances entirely, you can immediately improve your ratio. Pay off high-interest credit cards first to maximize the positive impact.

Increase Your Income

Another fast way to lower your DTI is to boost your income, even if temporarily. Taking on a side job or freelance work for a few months can quickly raise your gross monthly income.

With a higher income denominator, your DTI ratio will drop accordingly. Options like ridesharing, tutoring, delivery services and online work can generate extra cash quickly.

Reduce Interest Rates

Lowering the interest rates on your existing debts will reduce the required monthly payments that factor into your DTI ratio. Contact each lender to request a lower rate through a hardship program or balance transfer offer.

Even a small reduction in interest can make your minimum payments noticeably smaller each month and improve your DTI.

Refinance Loans

Refinancing high-interest loans like auto loans and private student loans can potentially lower your monthly payments and DTI ratio. Run the numbers to see if refinancing to a lower rate with a new lender is feasible.

Focus on the loans with the highest rates first to get the most bang for your buck when refinancing.

Ask for Credit Limit Increases

Request higher credit limits on accounts with low balances. The resulting boost in total available credit will lower your utilization ratios and improve your DTI indirectly.

Even if you do not carry balances, utilizing too much of your available credit can negatively impact DTI calculations. Higher limits offset your spending for DTI purposes.

Negotiate Monthly Bills

Look for opportunities to negotiate lower monthly expenses that factor into your DTI ratio. Call your internet provider, cell phone carrier, cable company, auto insurance broker, and other service providers to request discounts or package deals.

Lowering your utility payments, phone bills, insurance premiums and other recurring expenses will reduce the debt obligations used to calculate your DTI.

How to Calculate Your Exact DTI Ratio

Figuring out your specific DTI percentage is essential for tracking improvements over time. Follow these steps:

1. List all monthly debt payments like auto loans, credit cards, mortgage/rent, student loans, child support, etc. Include minimum payments due even if you pay more.

2. Add up the total amount you pay each month towards debts. Do not include bills like utilities.

3. Calculate your total monthly gross income before deductions.

4. Divide the total monthly debt payments by the gross monthly income.

5. Convert the number to a percentage by multiplying by 100.

For example, if your monthly debts are $2,000 and income is $5,000, your DTI is $2,000 / $5,000 = 0.4 = 40%.

Repeat this each month to see your DTI steadily dropping as you pay off debts and increase earnings. Aim for the 36% target or lower.

Ways to Keep DTI Low Long-Term

Once you reduce your DTI ratio, maintain your progress with these habits:

• Make more than the minimum payment on credit card and other debts
• Avoid taking on new debt and loans unless absolutely necessary
• Build emergency savings to handle unexpected expenses without borrowing
• Contribute to retirement accounts to boost long-term income
• Follow a budget that aligns spending with your income and priorities
• Consider balance transfer offers for credit card balances
• Negotiate lower interest rates from lenders as often as possible
• Avoid spending more as your income rises over time

The faster you can minimize your DTI, the easier it will be to qualify for loans and credit cards with better terms. Monitor your ratio frequently and take the necessary steps to keep it below 36%. A lower DTI ratio leads to greater financial opportunities and flexibility.

Key Takeaways

• Your debt-to-income ratio compares monthly debt payments to gross monthly income
• A lower DTI improves chances of qualifying for desirable loan terms and rates
• Fast ways to reduce DTI include paying off credit cards, increasing income, lowering interest rates, refinancing, and negotiating bills
• Calculate your ratio each month to track improvements over time
• Build habits to maintain a low DTI ratio long-term and enable better access to credit

Focusing on quickly lowering your DTI ratio will benefit your finances now and in the future. Use these fast yet effective strategies to reduce your ratio to open up more options. With a lower DTI, you can move forward more easily as you take on major purchases and other borrowing needs.