Your debt to income ratio is the percentage of your monthly income that goes towards paying your debts. A high debt ratio can consume your income and inhibit your ability to access financing. Lenders use the ratio to justify higher interest rates on loans and credit cards and even to deny your application. Fortunately, there are effective methods to reduce a high debt ratio and increase your disposable income.
Reduce your debts. Assess your debts and your disposable income (money leftover after paying bills), and create a plan to eliminate your credit cards and installment loans. Negotiate a lower interest rate with creditors to help you pay off debt faster. An extra $300 a month can eliminate a $2,000 credit card debt in six to seven months.
Lower your expenses. If necessary, take drastic steps. If rent and car payments take a huge chunk of your income, consider downsizing to save money. Use this extra money to pay down debts.
Schedule a meeting with your employer to evaluate your skills and to see if you're eligible for a salary increase. Earning more money on your job increases your monthly income and brings down your debt to income ratio. Request overtime.
Apply for a part-time job. When a salary increase isn't feasible, explore other ways to generate income, such as a part-time job in the evenings. Resist the temptation to spend this extra money on non-essentials. Use the money from your second job or business to reduce debts and lower your debt ratio.
Divide your income by your total debt payments to calculate your debt to income ratio.
To qualify for a home loan, debt to income ratio should be no more than 36 percent, according to LendingTree.com.
A lower ratio can reduce the interest for a loan or credit card, and more of your payment will to toward reducing the principal balance.
- Divide your income by your total debt payments to calculate your debt to income ratio.
- To qualify for a home loan, debt to income ratio should be no more than 36 percent, according to LendingTree.com.
- A lower ratio can reduce the interest for a loan or credit card, and more of your payment will to toward reducing the principal balance.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.