How to improve your debt-to-income ratio
Your debt-to-income (DTI) ratio is one of the most important financial metrics that lenders use to assess your ability to manage and repay loans. It compares your total monthly debt payments to your gross monthly income, and a high DTI can hurt your chances of qualifying for credit. Whether you are applying for a personal loan, mortgage, or SACCO financing, maintaining a low DTI shows you are financially responsible. If your DTI is too high, it may be a sign that you are overextended and need to improve your financial position before taking on more debt.
Understand Your Current Financial Standing
The first step to improving your DTI is to understand where you stand. Start by calculating your monthly debt payments, including loans, credit cards, student loans, or any other fixed obligations. Then compare this total to your gross monthly income, which includes your salary before taxes, bonuses, and any additional income sources. The result is your DTI ratio, expressed as a percentage. For example, if your debt payments total KSh 40,000 and your income is KSh 100,000, your DTI is 40%. Financial institutions often look for a DTI of 36% or lower for optimal loan approval, although some lenders may accept up to 43% for certain loan types.
Reduce Your Monthly Debt Obligations
One of the most direct ways to lower your DTI is to reduce your monthly debt. This could involve paying off small debts with high interest rates or focusing on loans that carry the biggest monthly obligations. Start with debts that can be cleared quickly to free up cash flow. Consider making more than the minimum payments on your loans when possible to reduce both the principal balance and the interest charged. If you’re juggling multiple debts, consolidating them into one loan with a lower interest rate can make repayment easier and more affordable. Reducing credit card usage and avoiding new debts also helps you maintain a steady or declining DTI.
Increase Your Gross Monthly Income
While cutting debt is crucial, increasing your income is the other side of the equation in improving your DTI ratio. You can boost your income by taking on a part-time job, starting a side business, or monetizing your skills online. If you are employed, consider asking for a raise or looking for higher-paying opportunities. Any legitimate increase in income will improve your ratio, provided you do not take on new debt that offsets the additional earnings. Keep in mind that when applying for loans, only verifiable income will be counted, so ensure that your additional income sources can be documented if needed.
Adopt a Strict Budget and Financial Discipline
Improving your DTI requires commitment and consistency. Creating a realistic monthly budget helps you track spending, identify areas of waste, and prioritize debt repayment. Set aside a fixed portion of your income for savings and avoid unnecessary expenses. Budgeting tools and mobile apps can help you stay on course. Additionally, avoid co-signing loans for others or taking out new loans unless it is absolutely necessary. Practicing financial discipline allows you to gradually reduce your debt burden and keep your DTI ratio within acceptable limits.
Monitor Your Progress and Stay Informed
Once you begin working toward lowering your DTI, it’s important to review your progress regularly. Recalculate your ratio monthly or quarterly to see how your efforts are paying off. As your debts decrease and your income increases, your DTI will improve, giving you better access to financial products and more peace of mind. Staying informed about changes in interest rates, lending guidelines, and personal finance best practices can also help you make smarter decisions moving forward.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. satrendmagazine@gmail.com
