Your credit score is impacted by multiple factors, including past payment history, length of credit and your debt-to-income ratio (DTI). Understanding these criteria can help you achieve greater financial wellness and adopt behaviors that boost your credit score over time. Today we’re going to explore what DTI is and how it impacts your creditworthiness with lenders.
What is debt-to-income ratio?
In simple terms, DTI is a financial measure of your monthly debt payments compared to your gross monthly income. To find your DTI, add up all your recurring monthly expenses including rent or mortgage payments, loan payments, credit card payments and monthly utilities. Divide that sum by your gross monthly income, the total amount you earn each month before taxes and other deductions.
For example, if your monthly income is $2,500 and your monthly expenses are $1,250, your DTI would be 50%. A lower ratio is better, as it indicates a greater ability to pay back loans. The Federal Reserve considers a DTI of under 20% low, while 40% or more is considered financially stressed. A high DTI can make it more difficult to obtain loans, mortgage approval and low interest rates because it indicates you are financially overextended.
How to improve your DTI:
Build a budget and reduce monthly expenses.
The first step in taking control of your finances is getting really honest about where your money is going. Build a budget that accounts for every dollar in and every dollar out, then look for opportunities to reduce your monthly expenses. This might mean saying goodbye to monthly manicures or cutting the cord on cable. There is a big difference between must-haves and nice-to-haves, and ditching those recurring monthly nice-to-haves can add up in surprising ways.
Increase your income.
Whether you pick up a part-time job, start doing freelance work, launch a home business or start selling items on a service like Facebook Marketplace, boosting your income is another way to tip your DTI ratio in your favor.
Consolidate your debt + pay down your credit cards with a personal loan.
Consolidating old debt and paying down high-interest credit cards is a great way to lower your DTI. With a World loan, instead of multiple payments per month you’ll make one set payment. Not only does this simplify things, it often means a lower payment moving forward, which can free up extra money each month.
We had such a positive experience getting a loan here. We needed to consolidate all our debt into one easy payment and they made the entire process easy and pleasant, with an affordable option for repayment and always being able to contact them and speak to someone with the answers when we need them.
– Brooke S.
If you’re interested in exploring debt consolidation and learning more about how a personal loan can help you, reach out to your local branch. Our loan specialists will work with you to find the right solution even if you’re struggling with a high DTI.