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 »

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 »

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 »

Bad Credit – Debt Consolidation Loan

Some Bills.com readers who have bad credit mention unsecured loans as a means of consolidating their debt. In theory, it is possible to get an unsecured loan to consolidate debt. However, in practice, most people who want or need an unsecured loan to consolidate debt do not qualify for an unsecured loan. Why? Lenders want three things in a perfect borrower:

  • Stable income
  • Excellent credit history
  • Low debt-to-income ratio

Two items on the list, credit history and low debt-to-income ratio, trip up many people seeking a debt consolidation loan. This is a classic catch-22 situation. The potential borrower would not need a debt consolidation loan if they had excellent credit and a low debt-to-income (DTI) ratio, and a person who needs a debt consolidation loan almost always has a high DTI and marginal credit. For these reasons, a person with low credit seeking a debt consolidation loan should look for a debt consolidation program or think creatively about a loan source.

Home Equity Loan

A home equity loan is a popular type of debt consolidation loan. Tighter lending guidelines along with a significant drop in property values in many parts of the country have made this kind of secured debt consolidation loan more difficult to obtain. A cash-out refi or a HELOC requires good to excellent credit, strong DTI, and most importantly, significant equity in the home. The days of 100% financing are gone; most lenders do not offer cash-out financing above 80% of your home’s value….. 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 »