In our earlier series, we examined the essential concept of the Debt-to-Income Ratio (DTI), how to figure out DTI, what constitutes it, the different DTI categories, and the preferred DTI ratio to aim for. In Series 2 of our exploration into Debt-to-Income (DTI) Ratios, we will be interpreting DTI Ratios and how to improve the DTI ratio.
Interpreting DTI Ratios
DTI ratios fall into various categories, each offering insight into your financial condition:
1. Low DTI (Less than 20%):
Congratulations if your DTI falls into this range! A low DTI indicates that you have a healthy balance between your debt payments and your income. Lenders view this favourably, and you likely have room in your budget to take on additional financial responsibilities or save and invest more.
2. Moderate DTI (20% to 35%):
A moderate DTI suggests that you are managing your debt reasonably well. Many people fall in this range, which means you’re doing okay with your money because your debts and income are balanced. Lenders are likely to consider your loan applications favourably in this range.
3. High DTI (Above 35%):
A high DTI, significantly above 35%, may cause concern. It points out that a considerable share of your income is employed in servicing your debt. It might cause financial stress, make it hard to adjust your budget and make it challenging to get more loans. When your DTI is high, reviewing your financial condition carefully is crucial.
How to Improve the DTI Ratio?
If you find that your DTI is tilting towards the higher side, don’t worry; there are numerous effective tactics you can use to improve your financial situation and strive for a healthier DTI:
1. Reducing Debt:
One of the most impactful steps you can take is to pay down high-interest debts, such as those associated with credit card balances. Furthermore, considering alternatives like combining your debts or refinancing can be very beneficial. This might reduce the interest charges on your current debts and make them simpler to manage.
2. Increasing Income:
Consider widening your income streams by actively seeking part-time employment, freelancing, or negotiating a salary raise within your current job. Augmenting your income can have a substantial positive influence on your DTI over time.
3. Budgeting Prudently:
Crafting a comprehensive and meticulous budget is fundamental to your financial journey. A carefully planned budget clearly shows how much money you earn and where it goes. With this visibility, you can pinpoint where to reduce expenses and allocate those funds to repay your debt.
4. Setting Realistic Goals:
Establishing well-defined financial goals and priorities is an essential motivational tool. Having specific objectives to work for can act as a motivator in your efforts to make your DTI and financial health better. These objectives might include paying debts, saving for significant life occasions, or establishing an emergency fund.
5. Professional Guidance:
In situations where your DTI appears exceptionally high or if you’re encountering difficulties in managing your debt effectively, seeking assistance from a financial advisor can be an invaluable step. A financial advisor possesses the expertise to offer personalised guidance and tailored strategies that align with your unique financial circumstances.
Always remember that achieving a better DTI is a slow and steady process that calls for your unwavering commitment and persistence.
Final Words
In this series, we have covered interpreting the DTI ratio. Whether your DTI is low, medium, or high, it gives you meaningful information about your finances.
Moreover, we’ve discussed improving the DTI ratio, emphasising that a high DTI is not a financial dead-end. You can adopt these simple strategies to lower your debt, raise your income, and establish sensible financial targets to improve your DTI in the long run.
In the next series, we will cover the importance of the DTI ratio, how it can influence your borrowing capacity and how it guides your budgeting decisions.