In this work, you will learn how to lower your debt-to-income-ratio. Your debt-to-income ratio is the percentage of your income for paying your debt monthly. If your debt-to-income-ratio is low, you will not spend too much of your income on debt payment. You will have enough to save and take care of other needs.
To calculate your debt-to-income ratio, add all your monthly debt payments, including credit cards and loans. Divide them by your monthly income. Multiply the result by 100 to get a percentage. For instance, if you spend $2000 each month on debt and have a monthly income of $6,500, your debt to income ratio will be approximately 31%.
How to lower your debt-to-income-ratio ; High Debt-To-Income Ratio
Moreover, in a situation that your debt-to-income ratio is more than 50%, you have excess debt. Really, your debt-to-income ratio should be less than 36%. If it is more than this, you have a problem.
How to lower your debt-to-income-ratio ; Negative Side of a High Debt-to-Income Ratio
More than half of your income goes to debt repayment. You may not afford to pay bills, save for the future, invest, buy a home or a car. You cannot even help your dependent relatives.
Also, you will have difficulty getting approval for loans, especially a mortgage or auto loan. A High debt payment is an indication that a borrower will miss payments.
How To Lower Your Debt-to-Income Ratio ; How to Reduce Your Debt-to-Income Ratio
There are generally two ways to lower your debt-to-income ratio. The first thing to do is to increase your income. You may need to get a second job, work some overtime, turn your favorite pastime into a work, ask for a salary increase, take on a part-time job or start a business. If you can increase your monthly income without raising your debt payments, then you can lower your debt-to-income ratio successfully.
How To Lower Your Debt-to-Income Ratio ; Pay Off All Your Debt
Moreover, the second way to lower your ratio is to pay off all your debt. This may be hard especially if you do not have all the money at hand. But note that in debt repayment mode, your debt-to-income ratio will increase for a while because you are spending more of your monthly income on debt payments. Here a higher part of your income will be going toward debt repayment.
Let us say that your monthly income is $3,000 and you currently spend $600 on debt each month, then your debt-to-income ratio is 20%. If you decide to spend $800 a month on debt payments, then your ratio would increase to 27%.
Conclusively, if you have the money to pay all your debt, pay it. It will drop your debt to income ratio to 0%. You will be as free as air to spend your income on other important things rather than paying debts.