Good money management skills help you maintain a well-balanced budget and ensure your bills are paid on time. But there’s more to it than that. Your personal financial health also depends on a good credit score. There are many things that go into creating a high score. One of these is your debt to income ratio. These tips will help you learn more about ratios and how to fix your debt to income ratio.
Debt to Income Ratio Basics
Your debt to income ratio (DTI) is a number that compares how much money you have coming in and how much you owe. It’s determined by dividing how much you owe by your income. For example, let’s say your monthly gross income is $6,000 and your total monthly payment for your home, car, student loan, and credit cards is $1,800. Divide your monthly payment amount ($1,800) by your income ($6,000) and you get 30%, your debt to income ratio.
You can find your ratio with an online DTI calculator. If your DTI is under 36%, you are in good shape. Financial professionals advise you to keep your ratio under 36% because it indicates that you have enough money to pay your bills on time. It also tells lenders you are careful about how much debt you take on.
Early this year, Statistics Canada announced that the national DTI had dropped, reporting an average ratio of 163.2%. (No, that’s not a typo or a miscalculation.) Lenders and government officials are worried that average Canadians are in trouble, taking on more debt than they can handle.
How to Fix Your Debt to Income Ratio
Is your DTI higher than 36%? You can lower it by following some good advice from financial professionals.
Begin by paying down your debt. You can start reducing the amount you owe by:
- Revisiting your budget. Make debt reduction your number one goal and cut unnecessary expenditures.
- Using the snowball method to pay off debts. Start by paying off the card or debt with the lowest balance. Continue paying off your additional debt using the cash you gain from the previous payoffs.
- Using some of your savings to reduce your debt load.
- Refinancing your home. Tap some of the equity you have earned to pay down your debt. Only refinance if you can get a better rate than you have now.
Promise yourself not to take on any new debt—no new credit cards or consumer loans. You can begin living a low-stress, debt-free life by paying down debt and:
- Planning your spending
- Saving for expensive items instead of going into debt
- Saving for emergencies
You don’t have to save much each month. Putting away just a few dollars a month can quickly add up to a nice nest egg.
Learning how to fix your debt to income ratio is a good first step.