How to Reduce a Debt to Income Ratio to Improve My Credit Score

Several different factors impact credit scoring. Having a high debt to income ratio can lower your credit rating, and even disqualify you for a loan. Lowering your debt to income ratio is one of the keys to building a good credit rating, and by lowering your debts, you'll create more disposable income. Fortunately, there are numerous ways to accomplish this goal.

Instructions

1

Calculate your debt to income ratio. Collect your credit card, mortgage and loan statements and calculate your total debt payments by adding up the minimum monthly payments. Take this number and divide it by your gross monthly income to determine your ratio. A good debt to income ratio is less than 36 percent.

2

Assess your household budget. Gather your monthly statements and calculate your total monthly expenditures. Subtract your essential monthly expenses such as housing, transportation, insurance, food and minimum debt payments from your total take-home income to determine your disposable or extra income.

3

Get rid of debt. Assign a proportion of your monthly disposable income to make extra payments towards your credit cards and other smaller loans. Talk to a mortgage broker and discuss the option of paying off debt with a home equity loan or refinance. If this isn't feasible, contact a non-profit debt consolidation agency, who'll help you obtain a lower interest rate on your bills and show you how to manage your accounts until you're debt-free.

4

Decrease monthly expenses. Consider downsizing to lower your housing expense or trade-in your automobile for a less expensive car. If this isn't possible, cut back in other ways. Eliminate cable services, cancel your landscaping service, cut out expensive hair appointments or other discretionary spending. Establish a strict budget each month for extras like eating out and entertainment. Use this extra "found" money to pay off debts.

5

Increase income. Once you've done everything you can to lower your debts, brainstorm ways to increase your monthly income such as asking for a raise, looking for a better paying job, taking an additional part-time job, or making money with a side business.

6

Recalculate your debt to income ratio. Once you have followed the steps above, do the math to see how much you have lowered your debt to income ratio. If you have managed to bring it below 36 percent, this should have a positive impact on your credit score.