How to Lower Your Debt Ratio

Many credit-users mistakenly assume that, as long as they can pay their debts, the amount of debt they carry doesn't matter. While this may seem like a logical assumption, it's actually far from true. When you set about acquiring that dream house, you will likely see that your debt to income ratio, or the percentage of your earnings that is already allocated to the repayment of your debts, is incredibly important. As Lending Tree reports, mortgage lenders are not likely to make you an offer if your debt to income ratio is higher than 36 percent, meaning that if you are currently living paycheck to paycheck, some debt ratio rehab may be in order.

Step 1

Pay off revolving credit accounts. If your years in school, the cost of your wedding or just poor spending habits have allowed your credit card balances to creep up a bit, now is the time to get them back in line. Not only does carrying money on your credit cards hurt your financial bottom line, it also impacts your debt ratio, as you have a requisite payment on each of your balance holding cards each month. Start your debt ratio therapy by paying off your credit accounts and committing to not carrying a balance on these potentially pricey plastics.

Step 2

Seek a lower required payment on your student loans. While you likely want to pay off your student loans ASAP, getting your student loan balances down to zero in a year of two may not be a realistic goal. Since you can't pay them off immediately, contact your loan lender and ask if they can reduce your monthly payment obligation. When your debt to income ratio is calculated, lenders use only your required minimum payment each month. This means that if you get your required minimum reduced from $350 to $150, your ratio will improve.

Don't, however, allow this lowered required payment to slow down your repayment process. To ensure that your student loan repayment doesn’t become a lifelong struggle, continue to pay the higher amount, or even more if you can swing it.

Step 3

Buy cars with cash. You may, in your new found two-income glory, be eager to take out a loan on a shiny new car. While replacing your beater with a sparkly new purchase may temporarily make you feel good, it will not have a good effect on your debt ratio. If you must buy a new car, do so with cash whenever possible. If you can hold out, do so as this new car purchase may make it harder for you to reach your home ownership dreams.

Step 4

Increase your income. If you can't reduce your debts, the only way to lower your debt ratio is to increase your income. If you are desperate to make yourself appear more credit worthy, consider taking on a side job to bolster your income. This added income will not only pad your bank account, it will also make you appear a more desirable mortgage candidate.

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