9 Ways to Lower Your Debt-to-Income Ratio Fast

Debt-to-income ratio (DTI) affects everything from credit score to loan approval. Here’s how to improve yours to get the best rates possible.

January 25, 2024

Navient may receive compensation when you click on links associated with this Navient Marketplace. Navient is not being compensated for any application, quotation, or the purchase of any financial products.

Your debt-to-income ratio is an important measure of your financial health — and one that can determine whether or not you qualify for new credit cards or loans. It tells lenders whether you can handle debt responsibly. 

It’s also an important component of your credit score. The lower your debt-to-income (DTI) ratio, the better your score. So, if you’re looking to refinance or apply for additional loans, you’ll need to check your DTI ratio first. 

Here’s what you need to know about debt-to-income ratio – what it is, where to find it, and how to lower it fast. 

What is debt-to-income ratio (DTI)?

Your debt-to-income ratio is a financial metric that measures the percentage of your monthly income that goes towards paying debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income and then multiplying the result by 100. For example, if your monthly income is $5,000 and your monthly debt payments amount to $1500, your debt-to-income ratio is 30% (1,500/5,000). 

Why is DTI important?

Debt-to-income ratio is important because it gives lenders an idea of your ability to manage debt and make monthly payments on time. A high debt-to-income ratio indicates that a significant portion of your income is already allocated towards debt obligations. This can limit your financial flexibility, affect your ability to qualify for new loans or credit, and impact your overall financial stability.

What’s a good debt-to-income ratio?

A high DTI suggests that you may be strapped for cash. If you’re using a high proportion of your income to pay off creditors, you won’t look like a good candidate for new credit. 

In contrast, a low DTI makes you appear more creditworthy to lenders. That’s because a lower DTI ratio suggests that you have more disposable income available after meeting your debt obligations. It means you likely have the funds required to take on new lines of credit. 

Achieving a lower DTI can also positively impact your credit utilization ratio, another important financial metric. That’s because paying off debts will reduce the proportion of debt you have compared to your total available credit. A good debt-to-income ratio is typically considered to be below 36%.

Front-end versus back-end DTI

Front-end DTI and back-end DTI ratios are two components used to assess your financial health and borrowing capacity. 

  • The front-end ratio (also known as the housing ratio) focuses specifically on housing-related expenses. It includes the percentage of your income allocated to rent or monthly mortgage payments, property taxes, homeowners insurance, and, if applicable, homeowners association (HOA) fees.

  • Back-end DTI (also known as total DTI), on the other hand, considers all monthly debt obligations, including housing-related expenses like mortgage loans and rent payments. Car loans or auto loans, credit card balances, student loans, and any other outstanding debts are considered part of back-end DTI 

Lenders often use both front-end and back-end ratios when evaluating borrowers’ credit history. Many mortgage lenders look for a back-end DTI that’s 28% or lower for conventional home loans and 43% or lower for FHA loans.

How to lower your debt-to-income ratio

Here are some practical approaches to reduce your DTI ratio and improve your credit score.

1. Evaluate your debt

First, take a closer look at the total amount of debt you have. Then, for each debt, write down the interest rate, minimum payment, type of loan, and how much you still owe. This way, you have a solid baseline to start from. 

2. Try a budgeting model

The goal of budgeting is not to restrict, but to empower. It’s about directing your money consciously toward your personal finance1 goals, whether that’s tackling debt, building savings, or putting together the down payment for a house. 

Start by writing down your regular sources of income, like… 

  • salary

  • passive income

  • side hustles

Then, list your fixed monthly expenses, like… 

  • rent or mortgage payment

  • utilities

  • groceries

  • alimony

  • child support

  • transportation expenses 

Finally, add in variable expenses like… 

  • dining out

  • rideshares  

  • streaming platforms 

  • subscription box services  

  • paid apps

Next, turn a spotlight on where your money is going. Are there areas where you can trim expenses? Maybe it’s finding a cheaper phone plan, brewing your coffee at home, or cutting subscriptions. These steps can free up cash, which you can redirect toward debt repayment. 

Remember there is no one-size-fits-all approach to budgeting, so it’s worth exploring different models to see what works for you. Some popular budgeting methods include:

  • 50/30/20: This model suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. 

  • Zero-based budgeting: Zero-based budgeting assigns every dollar a specific purpose. Allocate your income to various categories, ensuring that your budget balances to zero. 

  • The envelope system: This system involves designating spending categories and using physical envelopes to manage cash flow. This approach can be effective for those who prefer a tangible way to track their spending. 

3. Prioritize debt payments

If you want to lower your debt-to-income ratio, the most obvious way to start is by paying off your debt. Now that you’ve looked over your budget and found ways to cut expenses, consider which debt to allocate that extra income to. 

Two popular debt repayment strategies are the snowball method and the avalanche method. Both methods focus on making minimum payments on all your debts except for one, which you put all your extra income toward to pay off as quickly as possible. 

  • With the snowball method, you pay off the smallest debt first and move up the ladder to the next smallest, then the next, and the next, until all your debt is gone. The snowball method does not take into account interest rate –– just the balance of each debt. 

  • With the debt avalanche method, you focus on paying off the debt with the highest interest rate first. Once that’s paid off, you move to the next highest interest rate, then the next, and the next, until all your debts are paid off. The debt avalanche method focuses only on interest rate, not balance. 

The method you choose is very much dependent the type of person you are: 

  • The avalanche method is ideal for self-motivated people who want to save the most money possible, since this method will result in paying off the highest-interest debt which will cost more in the long run. 

  • The debt snowball method is valuable for people who prefer the psychological benefit of quick wins. If you’re able to pay off a small credit card debt, for example, it can give you the motivation you need to move on to say, a car loan or a personal loan payment, and continue until all your debts are paid off. 

The debt avalanche method will save you the most money, but it can also be very difficult to stick with (if your loan with the largest interest rate has a large balance, it could be years before you pay off your first debt). 

The debt snowball method, on the other hand, won’t save you as much money on interest in the long run, but it’s much easier to stick to because of its emphasis on psychological quick wins. 

4. Boost your income

It’s great to request a promotion or secure a new job. However, that’s not always possible. Consider taking on a side gig, renting out equipment you already own, or selling crafts on Etsy. 

Remember that the income considered for DTI is typically gross income, not net income. Making withdrawals from investment accounts may provide a temporary income boost — and in turn, a possible credit score boost. 

Additionally, taking fewer deductions on your taxes might increase your gross income, positively influencing your DTI ratio. However, these can be tricky decisions to make. Ensure they align with your overall financial well-being and goals before moving forward. 

5.Negotiate with creditors

Many creditors are willing to negotiate interest rates or lower payments if you’re struggling to pay your debts. This approach is particularly effective for medical bills, as healthcare providers often recognize how challenging unexpected medical expenses can be.

If you’re facing financial hardship, call your creditor and be transparent about your situation. Sharing your specific circumstances may lead to more personalized solutions. 

6. Consider refinancing 

If you have multiple high-interest debts, consider refinancing1. With refinancing, a lender pays off your loans and issues you a single new loan in their place. 

This new loan will have a new interest rate, new terms, etc, and if you’re in a better financial situation than you were when you took out your original loans, you may be eligible for a lower interest rate, which could lower your monthly payment and/or save you a significant amount in interest over the life of the loan2

When you refinance, you’ll also have the option to negotiate new terms, like a longer repayment term, which can lower your monthly payment and in turn your DTI.

Keep in mind, if you extend your repayment term, you will most likely spend more in interest over the life of the loan. However, this may be worth it to you if it lowers your DTI to a range that improves your eligibility for the line of credit you’re seeking. 

7. Avoid taking on new debt

Successfully paying off current debt can sometimes create a false sense of financial freedom. It’s important to view this achievement as a milestone in your journey rather than an invitation to revert to old spending habits. Maintaining discipline is key. 

Recognize potential triggers or temptations that might lead you to incur new debt. Whether it’s the allure of a sale, peer pressure, or the desire for instant gratification, understanding these factors empowers you to make mindful decisions and resist unnecessary spending. 

8. Build an emergency fund

An emergency fund provides a financial safety net. It’s a cushion against unexpected expenses that might otherwise push you toward relying on credit cards or loans. An emergency fund can help you weather unforeseen challenges without accumulating additional debt. 

Financial experts often recommend saving three to six months’ worth of living expenses as your emergency fund. This can provide a solid foundation to cover essential costs in case of job loss, medical emergencies, or other unexpected events. Adjustments may be necessary based on factors such as income stability, the nature of your expenses, and personal risk tolerance. 

9. Use windfalls wisely

Windfalls refer to unexpected or sudden financial gains that come your way. These can include bonuses, tax refunds, family inheritance, work-related incentives, or even lottery winnings. 

When you receive a windfall, resist the temptation to splurge on non-essential items. Instead, use the cash to reduce existing debts. This could involve paying down your mortgage, making additional credit card payments, or settling outstanding personal loans

Get financial products customized to your needs

A higher DTI is a sign of financial instability. A lower DTI ratio, on the other hand, generally signals a healthy credit report. Low DTI is critical for qualifying for new credit cards and loans. 

Fortunately, different lenders assess DTI differently. If you’re looking to refinance, take out a new personal loan, or secure a balance transfer or debt consolidation loan, be sure to compare lender requirements before you apply. 

One of the best ways to do that is through an online marketplace like Navient Marketplace. Navient Marketplace lets you compare dozens of lenders3 for free, all in one place. Just enter a few details about yourself and get personalized results in seconds

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

2 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.

3 Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner.  All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial.  Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions.

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans.

Search and compare to get low rates and save.

Get Connected

Stay up to date on the latest offers in the Marketplace by Navient!

By submitting this form, you agree to receive emails from Navient and its subsidiaries.