Tips to Reduce Debt Ratio

When examining an application for credit, many lenders look at the consumer's debt-to-income ratio as one of the deciding factors in approving an application. The debt-to-income ratio gives lenders a glimpse into the financial picture of a consumer and helps evaluate his ability to repay additional debts. Often consumers look for ways to decrease their debt-to-income ratios not only to receive new credit accounts but to also get out of debt

Increase Income

One of the most obvious ways to decrease a debt-to-income ratio is to increase the amount of income that is coming in on a monthly basis. This can be done by obtaining a second job or having a spouse that is currently not working obtain employment. If a consumer works in a job that has available overtime, taking additional hours is another way to increase income. Consumers may also think about doing freelance work or starting a side business to bring in additional funds. Increasing income can also provide additional funds to pay down debts.

Pay Down Debt

When trying to reduce a debt-to-income ratio, many consumers may consider increasing the rate at which debts are repaid. This can be done by putting the increase in income directly toward debt repayment or by simply paying more on monthly payments. One recommended option is to pay additional principal payments on any debt to reduce the overall amount owed. This will also cut down on the amount of interest that is added to the account. Some consumers choose to use the snowball method of paying down debt by paying all their extra funds towards one debt until it is paid off and then snowballing that payment into the next debt.

Pay Cash for Purchases

After establishing a debt reduction plan to reduce a debt-to-income ratio, it is important to pay for subsequent purchases with cash, checks and/or debit cards. Consumers should also postpone any large purchases until they have the savings to pay in cash or have the option to make a larger down payment to decrease the amount of credit needed to complete the purchase. This will reduce the likelihood of the consumer taking on any more debt before the ratio is reduced.