Your debt-to-income (DTI) ratio gives you an indication of how high your debt is compared to your income. The lower your DTI ratio, the better. Lower DTI ratios mean you don't spend much of your income paying debts. On the other hand, a DTI ratio would mean much of your income is being put toward debt, leaving you without very much money to spend or save.
What's a High Debt-To-Income Ratio?If your DTI ratio is more than 50%, you definitely have too much debt. That means you're spending at least half your monthly income on debt. Between 37% and 49% isn't terrible, but those are still some risky numbers. Ideally, you want to have a DTI ratio that's less than 36%. That means you have a manageable debt load and money left over after making your monthly debt payments.
How to Reduce Your Debt-to-Income Ratio
There are times when having a high DTI ratio makes sense. For example, it's not terrible to have a high DTI ratio if you actively paying off your debt. But, if your ratio is high and you're only making minimum payments, that's a problem.
Generally, there are two ways to lower your DTI ratio. First, you can increase your income. That could mean working some overtime, asking for a salary increase, taking on a part-time job, or generating money from a hobby. The more you can increase your monthly income (without simultaneously raising your debt payments) the lower your DTI ratio will be.
The second way to lower your ratio is to pay off your debt. Once your debts are paid off, your debt-to-income ratio will drop dramatically. However, while you're in debt repayment mode, your DTI ratio will temporarily increase. That's because a higher percentage of your income will be going toward debt. For example, if your monthly income is $1,000 and you currently spend $480 on debt each month, then your ratio is 48%. If you decide to spend $700 a month on debt payments, then your ratio would increase to 70%. But, when you've paid the debt all the way off, your ratio would drop to 0% because you'd no longer spend your income on debt.