How to Lower Your Debt-to-Income Ratio

 February 25, 2021
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When considering you for a loan, lenders often look at your debt-to-income ratio, or the measure of your monthly debt payments in relation to your monthly gross income. If your personal debt ratios are high, lenders might see you as a risky candidate for a new loan and reject your application.

In this case, it’s better to lower your debt-to-income ratio before applying for a loan, which you can do by paying down debt or refinancing high-interest loans. Let’s take a closer look at what makes up a debt-to-income ratio and how you can improve yours.

Specifically, let’s answer the following questions:

What is your debt-to-income ratio, and why does it matter?

The debt-to-income ratio definition, commonly known as a DTI ratio, is simply a calculation of your total monthly debts divided by your income. Wondering what is included in a debt-to-income ratio? Here’s how it breaks down.

  • Front-end DTI: Your front-end DTI is a measure of your fixed housing related debt compared to your income. This could include obligations such as mortgage payments or mortgage insurance.
  • Back-end DTI: Your back-end DTI measures all other debts compared to your income. This could include debts such as student loan payments, credit card debt, personal loans or auto loans. In particular, student loans can increase your back-end DTI significantly if you have a hefty balance.

Since your debt-to-income ratio gives lenders a clear picture of your capacity to meet your debt obligations, a high ratio could make it hard to qualify for new loans. For certain financial products, such as a qualified mortgage, your debt-to-income ratio can only be a maximum of 43%.

There are steps you can take to lower your debt-to-income ratio though, so don’t be discouraged if yours is currently high.

What’s a good debt-to-income ratio?

So, what’s a good debt-to-income ratio? An ideal debt-to-income ratio is less than 35% of your income. If your personal debt ratio is higher than 35% but less than 49% you’ll likely want to start looking at ways you can lower it. While a debt-to-income ratio over 35% isn’t necessarily a healthy debt-to-income ratio, it’s also not an emergency — yet. Consider it a warning sign so you can begin taking steps to lower it.

Once your debt-to-income ratio rises to 50% and above, however, you’ll likely run into problems getting more credit, not to mention you could be setting yourself for a financial crisis if something unexpected occurs. If your debt-to-income ratio rises this high, begin taking drastic steps to bring it back down into a healthier range.

How to find your debt-to-income ratio

At this point you’re probably wondering, “What’s my debt-to-income ratio?” Learning how to find your debt-to-income ratio is quite simple. Here are the steps you can take:

  • Add your total monthly bills. Don’t forget to include bills like mortgage payments, alimony or child support, student loan payments, credit card payments and all other debt. Don’t include variable expenses such as groceries or gas in this number.
  • Add all sources of monthly income to find your total gross income.
  • Divide your monthly expenses by your pretax income to find your total DTI and multiply that by 100 to find the percent.

Here’s an example to show you how this could look. Let’s say your monthly bills come to a total of $2,500. Your monthly income is $5,500. Your debt-to-income ratio would be 45%.

If you’d rather not do the math by hand, use our online debt-to-income calculator to do the math for you:

Debt-to-Income (DTI) Calculator

How to lower your debt-to-income ratio: 7 steps to take

Learning how to reduce your debt can help you when it comes to figuring out how to lower your debt-to-income ratio. Here are seven strategies that you can begin using to get your personal debt ratio looking more favorable:

1. Target debt with a high ‘bill-to-balance’ ratio
2. Reassess your budget to pay off loans early
3. Stay on top of your credit report
4. Refinance debt to pay it down faster
5. Consider a balance transfer to lower interest rates
6. Negotiate a higher salary
7. Take on a side hustle

1. Target debt with a high ‘bill-to-balance’ ratio

When you’re trying to improve your debt-to-income ratio, your biggest priority will be lowering your monthly debt obligations in relation to your income. So it makes sense to target debt not based on its overall size, but on the size of your monthly payments for that debt.

For example, let’s say you owe $1,000 on a line of credit and your minimum monthly payment is $100, so 10% of the debt. At the same time, you owe $500 on a credit card and your minimum monthly payment comes to $125, so 25% of the debt.

Even though the overall debt on your credit card is much smaller, paying it off will do more to improve your debt-to-income ratio because your payment represents a larger portion of the balance.

2. Reassess your budget to pay off loans early

If you can find room in your budget to devote to repaying some loans now, that can definitely help improve your debt-to-income ratio. With each loan you repay, you’ll lower the debt side of the ratio.

If you have discretionary budget items you can reduce, such as entertainment or dining out, these can be temporarily redirected to repaying your debt. You might feel the pinch of a lifestyle change for a while, but the flip side is you’ll also likely meet your big financial goals, such as getting approved for a mortgage, sooner.

3. Stay on top of your credit report

An important part of improving your debt-to-income ratio is making sure the debts listed on your credit report are accurate and that your report is updated with any debts you repay. Consumers can receive a free copy of their credit report once every 12 months from each of the three credit reporting agencies — Equifax, TransUnion and Experian. You can order your report online through AnnualCreditReport.com.

If you notice errors in your credit report, contact the credit reporting agency to correct them. The credit reporting agency must investigate your claims and will typically do so within 30 days. Make sure you also ask the creditor that provided the information to the credit reporting agency, to update your records and verify the information is accurate with the credit reporting agencies.

4. Refinance debt to pay it down faster

One of the other popular ways to reduce debt is to refinance outstanding loans. If your credit score has improved since you originally took out your loans, you could qualify for a lower interest rate now. This is true for private student loans or other personal loans you may have taken out.

When you refinance your debt, you take out a new loan at a lower interest rate and use the funds from that loan to repay your old debt. You’ll still have the same original amount of outstanding debt, but you’ll save money with the lower interest rate. The money that you save can be directed toward repaying your loan faster. The sooner you remove debts from your credit report altogether, the sooner your debt-to-income ratio will improve.

If you go this route, don’t forget to factor in costs like origination fees on the new loan or prepayment penalties on the old loan. These could add up and detract from the savings you’d potentially get with a lower interest rate.

Also, although you could get a lower monthly payment by opting for a longer term when you refinance, this could also work to keep you in debt for longer, which means you’d pay more in interest over the life of the loan. If you decide to refinance debt such as student loans, compare refinancing rates online to make sure you’re getting your best deal.

5. Consider a balance transfer to lower interest rates

If you’re struggling to pay off credit cards with high-interest rates, one option is to transfer the balance of your high interest cards to a new card with lower interest rates. Many cards offer a 0% APR for an introductory period.

This could help you improve your debt-to-income ratio by getting you out of debt faster, as you wouldn’t be paying anything in interest during the introductory period and could direct more funds to the principal balance on your card.

There are a few important things to keep in mind if you go this route. Firstly, the 0% APR introductory offers are generally only an option for those with good credit. If you do qualify for that promotional offer, keep in mind that you might have to pay balance transfer fees, which could detract from the money you’d save.

Also, make sure you have a plan to repay the balance before the introductory rate expires. After that, you could see a significant interest hike and you’re often required to pay interest on the funds from the date you transferred the balance, not the date the promotional period ends.

6. Negotiate a higher salary

While reducing your debt is definitely an important factor when looking at how to lower your debt-to-income ratio, increasing your income is another aspect to consider. Negotiating for a higher salary, or requesting overtime if you work hourly, could be an option for moving the needle when it comes to earning more. Before negotiating for a raise, here are some important aspects to consider:

  • Track your accomplishments, hours and contributions. Presenting these to your supervisor in an organized way can help you make a favorable case.
  • Research comparative salaries. Use sites like Glassdoor or Salary.com to uncover what people in similar roles are earning in your area. If there’s a true discrepancy, having this information can make the decision more realistic for your employer.
  • Practice your pitch. Try your request out on friends or mentors who work in a similar industry. They can help you present your worth in ways your boss is likely to be more receptive to.

Earning more at work might mean taking on additional duties and responsibilities. Look for ways you can help your employer solve problems and suggest these projects as part of the additional work you’ll undertake with a raise.

7. Take on a side hustle

Another way to increase your income is to take on a side hustle outside of your normal job. A side hustle could be anything from driving for a ride-share or food delivery service to cleaning houses, doing yardwork or using your skills creatively, such as offering tutoring to students.

The added income of a side hustle can help increase the income portion of your debt-to-income ratio, plus you can direct it toward paying your debt, which can eventually help decrease that side of the equation.

Wondering how to find side gigs? Our list of side gig ideas can help you start your research.

Rebecca Safier and Shannon Insler contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2022!
LenderVariable APREligible Degrees 
1.74% – 8.70%1Undergrad
& Graduate

Visit Splash

1.74% – 7.99%2Undergrad
& Graduate

Visit Earnest

1.74% – 7.99%3Undergrad
& Graduate

Visit SoFi

1.89% – 5.90%4Undergrad
& Graduate

Visit Laurel Road

1.74% – 7.99%5Undergrad
& Graduate

Visit NaviRefi

2.05% – 5.25%6Undergrad
& Graduate

Visit Lendkey

1.86% – 6.01%Undergrad
& Graduate

Visit Elfi

N/A7Undergrad
& Graduate

Visit PenFed

1.99% – 8.38%8Undergrad
& Graduate

Visit Citizens

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 4, 2022.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Student Loan Refinance Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Let us know if you have any questions and feel free to reach out directly to our team.


3 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates range from 3.49% APR to 7.99% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for Navient.

Navient Disclosures

You can choose between fixed and variable rates. Fixed interest rates are 2.99% – 8.24% APR (2.74% – 7.99% APR with Auto Pay discount). Starting variable interest rates are 1.99% APR to 8.24% APR (1.74% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.


6 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 5/17/2022 student loan refinancing rates range from 2.05% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.93% Fixed APR with AutoPay.


7 Important Disclosures for PenFed.

PenFed Disclosures

Fixed Rate Loan Terms: 5 years/60 monthly payments, 8 years/96 monthly payments, 12 years/144 monthly payments or 15 years/180 monthly payments. Annual Percentage Rate is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed rates range from 3.29% to 5.43% APR. Rates are subject to change without notice. Fixed APR: Fixed rates will not change during the term. This rate is expressed as an APR. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.


8 Important Disclosures for CitizensBank.

CitizensBank Disclosures

Education Refinance Loan Rate Disclosure:  Variable interest rates range from 1.99%-8.38% (1.99%-8.38% APR). Fixed  interest rates range from 2.99%-8.63% (2.99%-8.63% APR).

IS Variable Rate Disclosure:  Variable Rates advertised are based on the one-month London Interbank  Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business  day, of the preceding calendar month. As of December 1, 2021, the one-month LIBOR rate is 0.09%.  Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will  vary based on applicable terms, level of degree and presence of a co-signer. Your final variable rate may  be based upon the 30-day average SOFR index, as published by the Federal Reserve Bank of New York.  The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.

ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of May 1, 2022, the 30-day average SOFR index is 0.29%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

Federal Loan vs. Private Loan Benefits:  Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
 
Citizens Student Loan Eligibility: : Applicants must be enrolled at least half-time in a degree-granting program at an eligible institution.
 
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DC, DE, FL, MA, MD, MI, NH, NJ, NY, OH, PA, RI, VA, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
 
Automatic Payment Discount Disclosure:Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount. Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on  their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan  servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to  successfully withdraw the automatic deductions from the designated account three or more times within any 12-month  period, the borrower will no longer be eligible for this discount.