When you want to apply for a new mortgage, a creditor will check your debt-to-income ratio. This tells the creditor if you are able to afford to pay another monthly debt. According to the Consumer Financial Protection Bureau, you should aim for a debt-to-income ratio of 43% or less. If you have a debt-to-income ratio of 50% or more, that is considered to be high. If you’re interested in getting this number to a more manageable level, here are 5 ways to lower your debt-to-income ratio.
5 Ways to Lower Your Debt-to-Income Ratio
Increase Your Income
Increasing your income is the simplest way to lower your debt to income ratio. You can increase your monthly income by finding a side hustle or by simply asking for a raise from your current employer. It is estimated that more than 44 million Americans are making extra money with a side hustle. Some easy ideas for a side hustle include monetizing on a skill you already have, like offering independent services on sites like Fiverr. You can also sign up for apps like Uber, DoorDash, or Lyft to make extra income in your free time. If you do not have time for a side hustle, negotiate your salary at work. Lay the groundwork for your raise by taking on extra responsibilities and doing an outstanding job. If your employer does not want to give you a raise, start looking for around in the job market to compare salaries with other similar positions.
Don’t Make Any Big Purchases
If you are trying to lower your debt-to-income ratio, you should avoid making any large purchases that would add more debt to your portfolio. Even if you can afford it, making a large purchase that would open a new line of debt will bump up your debt to income ratio. If you want to lower your debt to-to-income ratio, that means holding off on buying a new car, starting a new home renovation project, or applying for a new credit card.
Pay off High Interest Debts Ahead of Schedule
Look at all your monthly debts and determine which one demands the highest monthly payment. Aim to pay off that debt first to lower your debt-to-income ratio. Whenever you can afford to pay more than your monthly payment, you are correcting your debt to income ratio. Also known as the debt avalanche method, you should aim to pay all the minimum payments on your monthly debts and use any extra funds to pay off the debt with the highest interest rates ahead of schedule.
Consolidate or Refinance Your Debts
If you do not have extra funds laying around to pay off your debts ahead of time, consider consolidating or refinancing your debts. This will allow you to raise your debt to income ratio by lowering your monthly interest rate. Restructure your debts by refinancing to include a lower interest rate. With a lower interest rate, the faster you can pay the debt off in full. If you have long term debts due at different times of the month with varying interest rates, consider consolidating your debts. It is common to get a 0% interest, balance-transfer credit card. Although consolidation can be useful, it is not a cure for your debt. If you have a small debt load, consider the debt avalanche strategy instead of consolidation.
Control Your Non-Essential Spending
Time to go put your payment cards in the freezer. If you wish to lower your debt to income ratio, then you should control how you spend your money in day-to-day purchases. Avoid buying unnecessary items that will only increase your credit card debt. Ask yourself before you purchase an item if you really need it or if you just want it. Stick to only buying the necessities. A popular way to manage money is the “24 hour Rule”. This rule requires you to think about a purchase for 24 hours before actually making the purchase. For example, if you see something you like in the store, go home and think about if the purchase is worth it. The next day, you can clearly make the decision whether to purchase the item or not. Giving yourself time to think about a product will render it worthy to purchase.
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