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 »

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 »

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 »

10 Tips for Debt Free

Can you imagine having no debt? What kinds of decisions come with each paycheck when you owe nothing? Your savings account is bursting at the seams, so you can add some more to the world travel budget. But wait, that budget is set for two years of travel already. Your time volunteering and visiting the orphanage you helped fund in Haiti will happen when the kids are on school break, so maybe it’s time to put a paycheck or two into the business you’ve always wanted to start. That could even add money to your money and set up the family for when you’re gone. No worries.

This kind of dreaming doesn’t have to be a dream. Whether you’re in a stage of life where college planning is central, retirement is imminent, or marriage and joint accounts are calendar days away, being debt-free is possible.

Instead of dreams of running away from it all and cracking coconuts on a deserted beach, take a few minutes to think about how you really want to live — maybe with electricity and some great vacations — and see how you can get started today.

1) Learn

Knowing your debt and your spending can free finances and prevent draining them in the future. While being $12,000 to $200,000 or more in debt may not sound great, it can be good, really. Installment loans and credit cards are often bad debts, but home mortgages and college loans generally are good debts because they have lasting value. Try a range of calculations with current and expected income, payment amounts and length of loan. Median debt for a college undergrad, for example, is about $20,000, and a 2009 study found that the average repayment time was 11 years [source: College Board].

If the large debt numbers are overwhelming, try learning about your own small purchases and how they add up. Keep receipts for a month or so, including those small grocery, drugstore and fast food purchases, and highlight items bought as “extras” or treats — the non-essentials. These could be pricey condiments from the international food aisle or electronic gadgets or new lotions and cosmetics or toys for kids. After finding your personal weak spots or spending trends, limit these types of buys to once a month so they become a real treat. Money saved can go to larger debts….. read more »

Debt Consolidation Pros And Cons

Financial independence is at the core of the American Dream.

No one sets out fresh out of college with aspirations and hopes of being dead broke at the end of their life!

But the unfortunate reality is that scores of people find themselves in significant personal and household debt by the age of 30.

Fortunately, there is good news. No matter how bad your current financial situation is, there is hope. If you take the right steps today, you can still reach your financial goals and find true financial independence.

Paying Down Debt

The first major step a person must take toward gaining control of their personal finances is deciding to eliminate all personal debts. There is no secret formula to making this happen. You simply have to be willing to cut expenses, which may mean less eating out, less entertainment, and fewer shopping trips each month, and then you direct this extra cash flow toward paying down your debts….. read more »

12 Debt Management Program Tips

A debt management plan may help, but do your research and consider all your options first. If your finances take a turn for the worse and you find yourself drowning in debt, a debt management program may help you keep your head above water. Debt management programs (sometimes called debt management plans) may be able to help you negotiate lower interest rates, get late fees waived, work out a payment schedule that’s acceptable to you and to your creditors, and consolidate your monthly payments into one. Keep in mind, however, that there are a lot of debt management programs that are unreliable or that charge exorbitant fees, and there are some that are just plain fraudulent. Also,keep in mind that the purpose of an agency debt management program is to get you out of debt and avoid bankruptcy. If your credit isn’t damaged, it probably will be by utilizing a reputable consumer credit counseling agency. Because their job is to help you live while paying off your creditors and acting on your behalf. Once you enter into the agreement with an agency, let them handle the collectors.

Do it yourself

The best kept secret in the debt management industry is that you can do most of the things debt management agencies do, and if you do it yourself, you can save yourself a lot of money in fees. Make a budget, cut unnecessary expenses, prioritize your debts, and call your creditors to ask if they’ll waive your late fees, reduce your interest rates, and/or work with you on a payment schedule. You may even be able to get them to “re-age” your account, which means that they report your past-due account as current. There’s no guarantee that they will, but there’s also no guarantee they will if you go through a debt management agency, so you’ve got nothing to lose by trying. Many times creditors will be happy to work with you if you make a good-faith effort to pay them. Also keep in mind that signing up with a Credit Counseling Agency can negatively affect your credit score.

Find a good credit counselor

Almost all debt management programs are administered by consumer credit counseling agencies–so much so, in fact, that the terms “credit counseling” and “debt management” are often used interchangeably. They’re not the same, though. You can and should get real credit counseling before you commit to a debt management program, and a credit counselor can and should help you make a budget and explore other options (such as self-help methods or consolidation loans) with you instead of just pushing you into a debt management program. Thoroughly researching the agency is the most important thing to do before deciding to enroll in their debt management program….. read more »

12 Most Effective Tips to Get Out of Debt

Many people tell us that they would love to pay down their debt or get rid of it altogether, but they aren’t quite sure of the best way to do it or where to start. There really isn’t any one “best way” that works perfectly for everyone. So here are a dozen suggestions to get you started. The more of these that you can apply, the faster you will get out of debt.

1) Pay More Than the Minimum

Make sure that you always pay more than your minimum payments. If you only make your minimum credit card payments each month, it can take forever to pay off your balance. If you want to pay off your balance quickly, pay as much extra as you can afford. Even an extra $50 each month will help. Try using a financial calculator to see how much you can save like this!

2) Spend Less Than You Plan to Spend

Most of us have wishes and wants that are bigger than our pay cheques. You might have heard the great saying that, “You can have almost anything you want; you just can’t afford everything you want.” Many people get into debt and stay in debt because they tend to buy what they want, when they want. Not even millionaires can afford to buy everything they want. If you want something, don’t buy it unless you have the money. If you can be satisfied with less than you would ideally want, even temporarily, you can use the money you save to pay down your debt. By the time your debt is paid off, you’ll probably have adjusted to your new priorities, and you can use the money that you are saving to put towards other financial priorities….. read more »

How to Get Out of Debt

Getting out of debt and staying out of debt is not easy. Chances are, you’re reading this article because you’ve already amassed a fair amount of debt and are thinking it will be impossible to ever get out from under it all. Learn how to stop incurring new debt and change your life forever.

1) Stop increasing your debt

If you have any credit cards that are maxed out, cut them in half. If you have more than one remaining credit card, cut them up. When you finish, you should have no more than one credit card. Also cut up any “convenience” cards, such as gas cards, department store cards, etc. You will use your one credit card only to buy “emergency things”, and things that you know you will be able to pay off in a short amount of time until you can get your spending fully under control.

2) Record your spending

The idea of writing down what you spend is a concept most people find annoying at best and useless at worst. However, this is actually your key to getting out of debt. You’re in debt because you spent money you didn’t have. If you’re like many people, your debt didn’t come from one single huge purchase; it was trickles of spending amassed over time. Avoiding more debt starts with knowing what you are spending your money on. Each day for one month (at least), write down every penny you spend, no matter how small.

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15 Tips For Consolidating Credit Card Debt

If you’re getting behind on your credit card bills, it’s time you take steps to manage your debt and avoid high balances and interest charges which can limit your financial options. Given below are 15 tips which can help you pay off credit card bills without leading you to debt problems. Check out the following sections to know about the debt consolidation benefits in detail and find out how the community helps you:

1) List your debts

Prepare a list of your credit card accounts along with the account number, interest rate, outstanding balance, payment due date, credit limit and the minimum payment. This will give you a clear idea about how much you owe on your accounts and help you manage your bills responsibly.

2) Pay more than the minimum

Try paying more than the minimum payment each month. The minimum payment includes mostly the interest on your account. So, if you pay only the minimum amount, the credit card company makes more interest while you lose the cash in your pocket. Moreover, it’ll take you longer to get out of debt. But paying more than the minimum reduces your balance and helps you pay off credit cards fast.

3) Negotiate a low interest rate

If you’re in financial problems or your bills are getting out of control, call the credit card company and tell them about your situation. If required, negotiate a low interest rate at which you’ll find it easier to make your credit card payments.

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3 Useful Tips to Pay Off Your Debt

Even if you don’t have a stack of credit card bills with high interest rates, you may have school loans, car loans or high-interest loans. There are ways to manage your debt so you can pay less in interest, minimize monthly payments and eventually eliminate these loans altogether. Consider these 3 ways to reduce your debt.

1. Look for lower interest rates

A lower interest rate allows for a higher portion of your payments to go towards paying off the principal of the loan, so you can pay off the debt faster. Here are a few ways to get a lower rate:

  • Request a lowered interest rate from your credit card provider
  • Open a lower interest credit card, and make a balance transfer
  • Move balances off of cards with especially high interest rates, and onto cards that can minimize these charges

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