What is Debt to Income Ratio?
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First of all, Debt to Income Ratio is the percentage of your monthly income that goes toward paying debts. So what the heck does that have to do with debt to income ratio? Well….Everything!
Debt to income ratio is the key indicator for your credit score. Your credit score drives the interest rate you pay on loans. The lower the interest rate, the lower your payment.
Debt-to-income ratio (sometimes referred as DTI) is one way lenders (including mortgage lenders) measure an individual’s ability to make monthly payment and repay debts. Debt-to-income ratio is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
The ratio is determined by calculating the debts that you owe on car payments, credit cards and other loans against your annual income.
The best way to keep green in your pocket and your banking account from going red is by maintaining a low debt-to-income (DTI) ratio.
Most people would love having more money in their pocket. How can you work on keeping your debt-to-income ratio as low as possible? Here are some ways to keep your debt down and ultimately, out of your bills.
Get a Free Debt Relief Quote to Jump-Start your Debt Consolidation
Sometimes you need a little help. With lots of bills there might not be enough wiggle room to negotiate interest. That is why you might want to consider the National Debt Relief, a leading debt negotiation company. They negotiate with your creditors to get a reduction of your outstanding balances on your bills. They get your creditors to agree to a lump sum payoff amount and they will forgive the rest of your balance.
You can get a Free Debt Consolidation Quote to see what rates are available right now.
Eliminate Credit Card Debt, Consider Credit Card Consolidation
The most avoidable debt out there is from those dreaded credit cards. Credit cards should be used sparingly and only exceedingly during emergencies. Eliminating credit card payments will eliminate an easy way to get into debt. Revolving debt will always instantly impact your income to debt ratio.
Here are several steps to help eliminate Credit Card Debt:
- Pay Off the Highest Interest Rate Card First
- Don’t use your Credit Cards, and if you must pay them off monthly
- Get organized, understand what goes in and out with the mindset that you can’t spend more than comes in
- Set a Budget, understand what needs to be paid and what you CAN afford
- Request a lower interest rate. Everything is negotiable with creditors. The better the credit, the more the leverage
- Consider moving and consolidating balances. Warning: Be very careful as plenty of lenders have associated fees
Keep Your Car Payments Low
Vehicles are necessity for a lot of people, but if you don’t need one or can eliminate a car payment, the savings car range anywhere from a few to several hundred dollars a month! Saving that money in the long term will help grow your overall financial health.
Thus, the better your DTI ratio, the lower your payment.
Make a Larger Down Payment
If you want to ensure your monthly auto loan payment falls well within your budget and ability to pay, save enough money to provide a substantial down payment. The more money you pay down on a vehicle, the lower your monthly payments.
If you want to see just how much a larger cash payment will affect your car payments, search online for car loan calculators and use them to figure out monthly payments.
You will quickly discover that even adding as little as $200 or $500 to a down payment will considerably lower your monthly car payments.
Shop for Better Rates
Regardless of your credit situation, you should always shop for the lowest interest rates on car loans. If you have excellent credit, poor credit or no credit at all, it doesn’t matter always get loan quotes from at least three or four different lenders and choose the loan option that is the most affordable.
As mentioned above, you should always strive to keep your credit in as good a shape as possible.
However, things happen and people do go through difficult times but, that doesn’t mean you have to accept the first interest rate that a lender offers you. Always shop around.
Consider Longer Repayment Terms
If keeping your monthly car payment as low as possible is truly your foremost concern, you may want to consider extending the length of the repayment terms. Instead of choosing a shorter 36 or 48 month term, opt for longer terms of 60 months or even 72 months. (But keep in mind these ultimately makes you pay more for the car by extending the terms)
Although you will pay more in interest charges, using this technique will allow you to lower your monthly payment somewhat. If your situation improves and you are able to make higher payments, you can always apply extra payments to the loan principle to help reduce finance charges.
Pay Off All Debt as Fast as Possible
That yearly bonus should go straight toward paying off debt, not to buy a new boat or for a down payment on a new car. The same applies to the tax return you may get each year.
If you need help I recommend working with the Credit Assistance Network, Inc. As part of the enrollment process, one of there trained Credit Specialists will review your credit reports and provide a consultation.
Using experience they create and mail a custom dispute letter to each of the 3 major credit bureaus disputing up to 45 individual items.
There are two ways that will build momentum in your debt repayment efforts. The first way is through the creditors themselves granting you some sort of relief, and the second way is for you to change how you are sending in your monthly payments either by submitting additional money, or by creating a debt payoff strategy. Paying the bills now with extra money allows you to have more money in your pockets sooner rather than later.
Create a Budget
How does a budget apply in the scheme of a debt-to-income ratio?
Sticking to a budget can help you avoid getting into debt in the first place. Listing out all your monthly expenses will show where you’re having shortfalls or overspending issues.
- Record your daily spending with anything that’s handy, whether it’s with a pen and paper or an app on your smartphone
- Plan for next month’s expenses and income so you don’t get taken by surprise
- Look for ways to spend less
Now that you understanding Debt to Income Ratio and your well on your way to pumping up your credit. The only thing standing in the way from more cash in your pocket is you. Don’t hesitate to visit your local Credit Union to help.
If you are interested in learning how how to get out of debt, I created a FREE 10 Days to Financial Freedom eCourse tutorial that will help you get out of debt. Please take a moment and share this article on your social media page.