How to Lower Your Debt-to-Income Ratio

A high DTI ratio means you spend a large part of your monthly income on debt payments, leaving less for your regular expenses and savings. A high DTI may result in harder to qualify for a new loan because lenders use it to determine whether you have enough income to qualify for a new loan.

The good news is that you can lower your DTI by either reducing your monthly debt obligations or increasing your gross monthly income. If you focus on paying down existing debt, avoiding additional borrowing, increasing your earnings, and reducing certain monthly payments, all help bring your ratio down.

How to Reduce Your DTI Before Applying for a Loan

If you’re planning to apply for a loan, lowering your debt-to-income (DTI) ratio beforehand may put you in a stronger financial position.

Below are a few practical steps to consider before submitting a loan application.

1. Pay Down Existing Debt

Paying down existing debt has a direct effect on your DTI. As you pay down balances and reduce your monthly debt obligations, such as credit card, auto, or personal loan payments. 

If you could save extra money each month, consider using it to pay down your existing debt. Focus on tackling the highest-interest balance first or focus on smaller balances. You could use the debt avalanche method, it focuses on paying off high-interest debt first, while the debt snowball method starts with your smallest balances. 

2. Pay Down Your Credit Card Balances

Paying down your credit card debt may help improve your credit utilization too. Keep in mind that credit utilization and DTI measure different things.

For example, if you have several credit cards with high balances, paying them down gives you more room in your budget and reduces overall debt burden.

3. Avoid Taking on New Debt

When you’re working to lower your DTI, be careful about taking on new debt. A new debt can make it harder to bring the ratio down. It also adds to the portion of your income that goes toward debt.

Before applying for a loan, avoid unnecessary borrowing such as: 

• A new car loan
• A personal loan
• Large credit card purchases
• Buy-now-pay-later plans
• Other installment debt

You don’t need to stop using credit altogether. Focus on your priorities to pay down what you already owe and avoid taking on new debt payments.

4. Increase Your Income

You can lower your DTI by increasing the income side of the calculation instead of only paying down debt.

Depending on your situation, you might:

• Ask for a raise
• Work additional hours
• Take on part-time work
• Start freelancing
• Earn income from a side business
• Look for a higher-paying job

For example, suppose you have $2,000 in monthly debt payments and earn $5,000 per month.

Your DTI is:

$2,000 ÷ $5,000 × 100 = 40%

If your monthly income increases to $6,000 while your debt payments remain at $2,000:

$2,000 ÷ $6,000 × 100 = 33.3%

Your debt hasn’t changed, but your DTI has fallen because your income increased.

5. Reduce Your Monthly Debt Payments

Depending on the type of debt, you may be able to refinance or change your repayment terms to reduce your monthly payment.

Just remember that a lower monthly payment isn’t always better. A low repayment means a longer repayment period, which increases the total interest you pay. 

Before making such a change, look at the bigger picture and consider whether it actually works for your overall finances.

6. Consider Debt Consolidation

By combining multiple debts into one payment, debt consolidation may simplify your monthly payments and help lower your DTI.

For example, imagine you have:

Credit card payment: $250

Personal loan payment: $300

Other loan payment: $200

That’s $750 in monthly debt payments.

If you consolidate those debts into one payment of $600, your monthly debt obligations would fall by $150.

That could lower your DTI because less of your monthly income would go toward debt.

However, don’t judge a consolidation option by the monthly payment alone. Look at the interest rate, fees, repayment period and total amount you’ll pay.

7. Cut Unnecessary Spending

Reducing everyday expenses won’t directly lower your DTI, because expenses such as groceries, entertainment, and many household costs aren’t included in the DTI calculation.

Look through your monthly spending and identify expenses you could reduce, such as:

• Streaming subscriptions
• Restaurant meals
• Unused memberships
• Impulse purchases
• Other discretionary expenses

Money saved by cutting spending can go toward reducing your debt.

Frequently Asked Questions

What is the fastest way to reduce your DTI?

The fastest approach depends on your finances. Paying off a debt with a large monthly payment can quickly reduce the debt side of your DTI. Increasing your income can also lower the ratio without reducing your debt.

Can I reduce my DTI without increasing my income?

Yes. You can reduce your DTI by paying off debt, paying down credit card balances or reducing your monthly debt payments.

Does paying off a credit card reduce DTI?

It can. Paying off a credit card can eliminate or reduce the monthly payment associated with that debt, which can lower your DTI.

Does debt consolidation reduce DTI?

Debt consolidation can reduce your DTI if it results in a lower total monthly debt payment. However, compare the new payment with the interest, fees and repayment period before making a decision.

Does increasing my income lower my DTI?

Yes. If your monthly debt payments stay the same while your gross monthly income increases, your DTI will decrease.

Final Thoughts

Reducing your DTI before applying for a loan doesn’t require one particular strategy. Start with your current numbers and look for realistic ways to lower your monthly debt payments or increase your income.

Paying off a debt, reducing credit card balances, avoiding new borrowing and putting extra income toward debt can all help bring your ratio down.

The sooner you start, the more time you have to improve your DTI before you apply.