Meet your behind-the-scenes credit “influencer”.
Did you know that there’s a BIG star of your credit show (often overlooked) that goes up for audition each and every time you apply for a loan or credit card?
Yes! It’s your debt-to-income ratio (DTI) – and it has major influential power over whether you get the very best interest rates and payment terms on loans and credit cards…or even get approved at all. Your debt-to-income ratio lets lenders know how much of your monthly income is currently being eaten up by debt payments and other financial obligations.
Why the fuss? It’s because DTI spills the beans on just how “up to your ears” you are in debt at the moment and shows how much wiggle room you really have available to comfortably take on any more debt. I bet you already kinda know what I’m going to say next…. Yup. The lower the DTI number is, the better! You.is.smart.
Every bank sets their own standards when determining what an acceptable DTI ratio will be, but as a good rule of thumb – below 35% – puts you in good target range to help qualify you for whatever you need.
Now let me tell you how I shrunk my DTI numbers in a big way…in just one year’s time!
Pay Down Debt
Well no surprise here, huh?
I had to take a long, hard look at where my money was going and figure out how I could redirect some of my dollars and cents to start chipping away at my debt load.
There are tons of recommendations for the best way to tackle your debt. Personally, I’m a fan of paying off debt with the lowest balances first! Seeing your debt disappear quickly is great motivation to keep you pumped up about eliminating the next one and the next one.
But if the interest rates on your higher balance cards or loans are sky high, you might want to consider one of the following options:
- Call your credit card company(ies) to negotiate lower rates. The better your credit, the more likely companies will be willing to work with you.
- Transfer balances from your higher interest rate credit card(s) onto lower interest rate card(s).
- Use a personal loan with low interest to restructure your credit card debt.
- Refinance your private student loans.
Once you get going, you’re going to feel really good about putting a dent in your debt!
Increase Your Credit Card Limits
I’m patting myself on the back for this one.
No need to eat bread and drink tap water to get yourself in position to get your DTI down. I have a clever little hack for you that I used in combination with the other steps I mention here!
One no-sweat way to immediately improve your DTI ratio is to ask your credit card company for an increase in the line of credit on your existing credit card(s). Closed mouths don’t get fed, right?
The ultimate win-win situation is to find out if your credit card company will check your eligibility for a higher credit line WITHOUT a hard inquiry credit check (so that your credit score doesn’t take a dip).
You may be surprised to find out that a number of credit card issuers can give you an increase by running a soft inquiry on your credit (which has zero impact on your credit score) combined with their internal review calculations on things like your payment history and length of time as a customer.
To put yourself in the best position for a credit line increase, make sure you:
- Don’t miss payments (Building a positive payment history is key to a great relationship with your lenders…and key to a great credit score)
- Let your lender know of positive changes to your income (Recent pay raise? Additional income coming in? It all matters!)
- Make more than the minimum payment, or better yet, pay off your balance in full each month
Often times, if you follow the above rules from month to month, your credit card issuer may give you an automatic credit line increase every six to 12 months (without you asking) to reward your “good behavior!”
Bonus: An increased credit line ALSO automatically lowers your credit card utilization. Lower utilization can mean a higher credit score! Boom!
Stop Taking on More Debt
Even though you scored that credit line boost, you DO NOT have permission to test out your new found riches. It is critical that you STOP piling on more debt, no matter how tempting it may be. It’s mind-blowing how quickly mindless credit card spending can translate into a debt hole you can’t easily dig yourself out of. Yikes!
If (and when) you need to use your credit card, pay off what you spent, in full, each month.
It’s not a bad thing to pay for small items and then pay them off in full each month. Lenders may be more willing to boost your credit line if they see a little activity here and there. You don’t have to go radio silent on them. Just be disciplined about your commitment to “spend small and pay off.”
Your DTI Hookup
Now what kind of financial girlfriend would I be if I didn’t hook you up with a FREE and super easy way for you to calculate and monitor your debt-to-income ratio?!
Turbo is a powerful app that takes all the labor and guesswork out of the process for you. Because who has time for all that addition and subtraction and division…when technology can do it for you?
Here’s how the magic works:
- Turbo pulls your debt totals directly from your credit report (don’t worry, soft inquiry – no SSN required and no impact to your credit score)
- You manually add in your monthly mortgage or rent amount
- Your income calculations are automatically pulled in from your tax reports (if you didn’t do your taxes via TurboTax, all good – you can manually enter your yearly income amount)
Das it! Once you’re set up, your current DTI percentages will be available to you immediately. And what’s really cool is that as you work to get your debt to income in check, Turbo gives you customized tips based on your tax and credit data, to help you improve your numbers and get you to where you want to be!
So now that you’ve been formally introduced to the star power that is your DTI ratio, get ready to be the most popular applicant at the table…
PS: My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective of her. Before I share any product or service with you, it must pass my Lisa Rule.
What’s the Lisa Rule? Lisa is a Dream Catcher and follows the advice I give here as well. If I would not advise Lisa to use a product or service, I won’t advise you to. YOU are my Lisas. I feel protective of you and your financial journey.
TURBO passes my Lisa Rule. Yes, I am a paid partner of TURBO’s, but I would not recommend a product or service that I didn’t believe was helpful and useful. This is a sponsored conversation written by me on behalf of Turbo. The opinions and text are all mine.