How Understanding Your Debt-to-Income Ratio Can Help

Keeping your debt at a manageable level is one of the foundations of good financial health. But how can you tell when your debt is starting to get out of control? You don’t want to wait until you can’t afford your monthly payments or your credit score starts slipping. Fortunately, there is a way to estimate if you have too much debt.

What is debt-to-income ratio (DTI)?
The debt-to-income ratio (DTI) compares your monthly debt expenses to your monthly gross income. To calculate your debt-to-income ratio, first add up all the payments you make a month to service your debt. That includes your monthly credit card payments, car loans, other debts (payday loans, investment loans) and your housing expenses – either rent or the costs for your mortgage principle, interest, property taxes and insurance (PITI) and any homeowner association fees.

Next, divide your monthly debt repayments by your gross income per month (before taxes are deducted). Multiply that number by 100 to get your DTI as a percentage.

For example, if you pay $400 on credit cards, $200 on car loans and $1,400 a month in rent, your total monthly debt commitment is $2,000. If you make $60,000 a year, your monthly gross income is $60,000 divided by 12 months for a total of $5,000 a month. Your debt-to-income ratio is $2,000 divided by $5,000, which works out to .4 or 40%.

How lenders view your debt-to-income ratio
Once you know your DTI, you can quickly get a better idea of whether it’s too high by understanding how lenders view it. Banks and other lenders study how much debt their customers can take on before they may start having financial difficulties, and use this knowledge to set lending amounts. The preferred maximum DTI varies from lender to lender, but it’s often around 36%….. read more »

Cure or Continued Credit Problems?

Interest rates haven’t been this low for decades, tempting some consumers to take on additional debt to ease existing credit woes. The goal is to consolidate various higher-interest balances into one, easier-to-handle and less-costly package.

But be careful of what looks to be a quick fix.

“You’re getting symptomatic relief, not a credit cure,” says Chris Viale, general manager of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam, Mass.

This fighting-fire-with-fire approach can take several forms. There are debt-consolidation loans, balance transfers to a zero-percent credit card and home equity loans or lines of credit.

But, says Viale, 70 percent of Americans who take out a home equity loan or other type of loan to pay off credit cards end up with the same (if not higher) debt load within two years.

Viale’s statistics underscore a major problem with debt consolidation: It feeds upon the tendencies that got you in trouble in the first place. By taking on yet another creditor, you’re adding the proverbial fuel to the fire. In this case, it’s your money that’s burning.

Plus, if you’ve taken on so much debt that you’re looking for more as a solution, chances are you won’t qualify for the very low interest rates you see advertised. Those generally go to people with stellar credit ratings.

However, if you’re at the end of your credit rope or swear that this time you’ll be more disciplined, debt consolidation may be something to consider despite its risks. Here are some popular forms of debt consolidation, how they work and a look at their pros and cons.

Home equity loan or line of credit

Home equity lines or loans often are touted as a quick and easy way to get out of debt. By leveraging your residence’s value, the pitch goes, you can get money to pay off other bills and a tax break, too.

But borrowing against your house can backfire. The biggest risk: You could lose your home if you default on the loan.

“Some hardship occurs and now they have double the debt and if it’s secured by their home, they could lose it,” says Diane Giarratano, director of education at Garden State Consumer Credit Counseling in Freehold, N.J.

And while equity loan interest generally is tax deductible, it could be limited in some situations. Even when it does provide a tax break, Cambridge’s Viale says “that doesn’t mean it makes fiscal sense.”

Giarratano agrees. “Banks will tell you how much you can borrow,” she says. “That doesn’t mean you should borrow the total amount, but that’s what people do.”

Still, a home equity line of credit or loan to pay off creditors can work for some debt-burdened homeowners. Just be sure to do your homework to guarantee that the home equity dollars and cents make sense. This Bankrate calculator can help your determine whether borrowing against your home’s equity is a wise move.

Zero-percent credit card

What about people who don’t own a house? In these cases, many turn to zero-percent credit cards to reduce debt. Again, prudence and discipline are required.

Companies offer these rates as teasers — enticements for you to switch credit card vendors. Much of the time, card companies target consumers with better credit, so that may leave someone struggling with debt without this option.

Even if you do qualify for a zero-percent or similar single-digit rate, it won’t last forever. Make sure you know when it will end and what the rate is expected to jump to when it does.

The low rate also lasts only if you pay on time. One late payment and the credit card company will jack up the rate. Also look for hidden fees and charges that can increase the actual cost of credit….. read more »

12 Tips to Get out of Credit Card Debt

Everybody with a credit card knows it’s smart to pay what you owe at the end of every month – right? According to CardWeb.com, an international credit card tracker, credit card debt is approximately $9000 per household for those carrying at least one credit card. Internet shopping increases the temptation to overspend, since cash or checks are rarely an option if you’re online to shop.

Holiday spending is a notoreous time when consumers rack up their credit card bills. According the Cardweb.com, Americans racked up just over $115 billion in retail spending on their credit and debit cards during the 2003 holiday shopping season and that doesn’t include store credit cards. Spending on cards is up about 7% from last year, twice the expected growth rate.

This becomes the equivalent of around $1400 per family, which seems like a modest amount to pay off in a couple of months. “But we all know that’s not how the real world works,” said Don Hofreiter, a sales executive with a Glendale, Calif., corporation. “Not only do people carry balances from month to month, but they continue to charge on the same card to compound their compounding interest problems.”

Escaping the Debt Set isn’t easy, but it’s the best path toward saving and investing for the future. Besides, zero balances eliminate the stress of debt.

Salary.com researched some of the top sources on personal finance (listed below). These 12 ways to get out of credit card debt are a compilation of what the experts recommend.

1. Stop running up balances
If you carry a balance from month to month, stop using credit cards entirely.
If you don’t have the discipline for it, put the cards into storage or cut them up.

2. Find your best offer
Comb the fine print on all your card contracts to make sure you owe the most money on the card with the lowest interest rate. If not, investigate the costs of transferring balances.

Alternatively, hold on to every solicitation you receive (1 billion are sent out each year). Look for the best introductory rates, perhaps six months at 5.9 percent or lower, and consider transferring all your balances to the new card….. read more »

5 Debt Consolidation Loan Tips

If you struggle to pay multiple credit card bills each month along with your student loan, your car loan and your mortgage, wrapping all those bills into one monthly payment may seem like a dream come true. But before you apply for a debt consolidation loan, you need to take steps to ensure that your financial plan doesn’t backfire.

Debt consolidation tips

1) Debt consolidation loan vs. home equity loan

If you own a home, you may be considering a home equity loan instead of a debt consolidation loan. While a home equity loan may offer you tax benefits since you can deduct your interest payments and will typically have a lower interest rate than debt consolidation loans, you are putting your home at risk if you are unable to make the payments. Make sure you have at least 20 percent or more in home equity before you tap into it to pay off your bills.

2) Compare interest rates

While debt consolidation loans usually have a lower interest rate than a credit card, the rate could be higher than your car loan or student loan interest rates. Be careful that the interest rate you’re quoted extends for the entire loan period also….. read more »

Credit Card Debt and Debt Consolidation Loans

One of the best solutions for credit card debt is debt consolidation – specifically the one that involves loans. However, it is important for you to possess the right requirements for you to maximize the benefits of this debt solution.

The idea is to get a loan that is big enough to cover your other debts. Once you have the amount, you can pay off your credit card debt and keep the cards so you are not tempted to use them again. Then, you will concentrate on paying off this one loan that you got.

What makes debt consolidation loans beneficial involve two factors: the single payment scheme and lower monthly contributions. Credit card debt is notorious for the high interest rate and finance charges that can grow your balance into a big amount. If you have barely enough to stick to your minimum payments, it will take you a very long time to finish paying off what you owe. Debt consolidation loans can help fix that – but only if you qualify for it.

Like any other loan, this debt solution will require you to possess a steady income. You need to show proof that you can afford to pay off the loan that you are applying for. Without it, you will not be granted the financial assistance that you need to go through this debt relief program.

The low monthly contribution that this debt relief allows to happen is due to the structured payment term and the low interest rate. For the latter to happen, you need a good credit score. This will signify that you are a low risk borrower and thus the need to protect the loan through a high interest loan is no longer necessary. If you do not have this, another way to enjoy the low interest is through a collateral. You will put on the line a valuable personal asset that the lender can take in case you default on your payments. That is their guarantee that they will get a form of payment from you….. read more »

Debt Consolidation Loan Tips

If you have multiple debts and are unable to pay them off now, a debt consolidation loan may be a very smart move. There are three primary considerations however: interest, term, and risk. Will your new loan lead to a lower overall interest rate and total interest payment? Will your term or payment period be shorter? And what risk does your new loan carry?

Interest

The biggest problem with debt is the interest you pay to carry it. Credit card debt is generally the worst by far, with interest rates often around 20%. If you have $10,000 of credit card debt at 20% and you make $250/month payments, you’ll end up paying an extra $6,617 in interest, for example. With the same figures, if you’re making 3% minimum payments instead of a $250/month fixed payment you’ll spend an extra $12,240 in interest over 25 years. Therefore, any loan you get to consolidate your debts needs to have a lower interest rate. Don’t get scammed into looking only at the monthly payment. Some dishonest loan sharks will attempt to raise your interest and increase your term so that you feel you’re getting a better deal with lower monthly payments, when in fact you’ll end up paying them more money and being in debt longer….. read more »

Bill Debt Consolidation Tips

If you choose bill consolidation as a solution to excessive debt, here are some helpful strategies to implement.

When Debt Becomes Excessive

It is easy to become overburdened with debt. When an individual has a relatively good history of paying bills on time, credit card companies are quick to offer credit limit increases or new credit cards at enticing initial interest rates. Consumers are quick to take companies up on these offers, promising themselves that they will not use the credit except in cases of emergencies. Without a budget and self-discipline, however, it is easy to pull out the plastic and engage in impulsive spending simply because the credit is available. Eventually, the monthly payments become overwhelming, and the debtor sees no way out of the financial strain. Bill consolidation can become an effective solution if the process is implemented correctly and debtor is willing to change future spending behaviors.

How It Works

The process of consolidation involves combining most or all of one’s unsecured debt into one larger loan with a monthly payment smaller than the combined payments of the original debts. Occasionally, secured debt, like a car loan, may be included as well, but generally mortgage loans are not included. The idea is to lower the total monthly debt obligation, so that the debtor can meet his obligations and expenses without stress….. read more »

7 Tips Debt settlement and Bankruptcy

If you’re drowning in debt and bankruptcy seems to be the only way out, think twice as there are alternatives which can help you pay off bills fast without affecting your credit as severely as bankruptcy. Debt settlement is one such alternative. It enables you to get out of debt legally by allowing you to pay much less than what you actually owe.
Debt settlement vs bankruptcy – Tips to help you make the right choice

Check out 7 things you should do to decide upon debt settlement vs bankruptcy.

  1. Check your credit report: Find out what negative items (such as late payments, collections, charge-offs, etc) you have on your credit report and on which accounts you still owe money. This will help you determine the extent of your indebtedness.
  2. Calculate your total debt: Determine how much you owe in total. Add up the outstanding balances on your credit accounts including those which are in collection.
  3. Calculate income from all sources: Determine your total monthly income including paycheck, bank savings, rental income, alimony/child support, investment returns, etc.
    If your income doesn’t exceed the amount paid towards your basic financial needs including housing expenses, utility bills, gas, groceries, etc., then you shouldn’t go for settlement. This is so because you can hardly save anything to settle your bills with a lump sum payment after a certain period of time….. read more »

8 Debt Management Tips

The general household seems to have accumulated plenty of credit card debt. The average per family tends to hover at about $8,000 in card debt with a credit card interest rate around 15% or so.

There is such a thing as good or acceptable debt. A mortgage, a college loan, and/or a car loan may very well be acceptable and many times (if not always) necessary. However, you still need to be responsible about living beyond your needs. It’s also wise to look for a very good rate on loans.

And of course there is plenty of bad debt that can be had. The bad debt usually falls in the credit card arena. People use it to pay for food at restaurants, general home supplies and other small items that would be better handled using cash. You can safely use your card to make such purchases as long as you pay off the balance each month or make a sizable payment to get it back to a zero balance as soon as possible. Don’t look at the card as disposable cash, but as serious revolving credit loan. If you don’t have the cash to cover the monthly charges, then assess your budget and cut your spending.

When credit card debt gets overwhelming, sometimes a regular loan, a debt consolidation loan, or even an equity loan may help manage debt. If you go that route, resist the temptation to spend yet more. Otherwise you may find yourself in financial trouble later on. Be well aware of how much you are spending and what you are spending your money on. Resist purchasing items that you don’t need or can’t afford. Credit cards require discipline on your part….. read more »

Student Loan Debt Consolidation Tips

Studying in the United States is very expensive nowadays with the cost of tuition and textbooks escalating day by day. With the increase of these costs, there is increased demand and need for student loan debt consolidation, both those who go to graduate school and for those studying abroad.

With the debt student loans consolidation, get a low interest rate with a flexible payback terms to meet the needs of people not working. But sometimes even these interest rates can make it difficult for you to pay your loan on time.

Two types of student loan debt consolidation

With the student loan debt consolidation, students are easy to manage their debt and find it possible to avoid debt default. This is because either helps in reducing the principal amount of your education expenses or even help in removing this amount in full. The debt consolidation loan applies to students who depends on the type of student loan you have.

There are two types of debt consolidation loan plans to choose from federal and private, If you have both types of loans, which is not entirely advisable to consolidate them into one package. This is because federal loans have government backing and are able to refinance at lower interest rates fell unlike their private loans….. read more »