Managing your debt-to-income ratio (DTI) is crucial to maintaining a healthy financial life. A high DTI can impact your credit score, making getting approved for credit or loans challenging and resulting in higher interest rates.
Your debt-to-income ratio (DTI) compares your monthly debt payments to your monthly income. To calculate your DTI, add your monthly debt payments, including credit cards, car loans, student loans, and mortgage payments. Your DTI percentage is calculated by dividing that sum by your gross monthly income.
If your gross monthly income is $6,000 and your total monthly debt payments are $2,000, then your DTI is 33% ($2,000 / $6,000 x 100).
Why is your DTI important?
Lenders use debt-to-income ratios (DTIs) to assess borrowers’ propensity for responsible debt repayment. A high DTI might result in higher interest rates and fees, which can quickly increase. If your debt-to-income ratio is high, you may need help being authorized for credit or loans.
How to Manage Your DTI for a Better Credit Score
Pay off your debts
The most effective way to lower your DTI is by paying off your debts. Start by focusing on high-interest debts, such as credit card balances. To determine which bills to tackle first, use the debt avalanche or snowball method. As you pay off your debts, your DTI will decrease, and your credit score will improve.
Increase your income
Another way to lower your DTI is to increase your income. Consider negotiating a raise, working overtime, or starting a side hustle to earn extra income. Use this additional income to pay down your debts, reducing your DTI and improving your credit score.
Avoid taking on new debt
Avoid taking on new debt, such as credit cards, car loans, or personal loans. Any new debt will increase your DTI and make it challenging to manage your existing debt. If you must take on new debt, ensure it’s affordable and fits your budget.
Get help from a financial professional
If you need help managing your debts or improving your DTI, consider working with a financial professional like The Oasis Firm. Experts on our team can craft a strategy just for you to reduce your debt and boost your credit rating.
We at The Oasis Firm know how crucial it is for your credit score that you keep your DTI in check. We provide several options for dealing with debt and improving your financial situation. If you’d like help reducing your debt, increasing your income, and boosting your credit score, our qualified professionals can craft a tailor-made strategy just for you.
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