Drug testing

Reducing Debt Before Its Too Late - How to Avoid the Pitfalls of Creeping Debt

Reducing debt usually isn't a high priority for people until they have already gotten into trouble with overspending. Using a few basic guidelines, and debt calculations, can help you see when your debt load is getting into the danger zone.

Budgeting Guidelines

Creditors use budgeting guidelines when reviewing and approving credit. If your debt exceeds the financial communities recommended guidelines, then you have a higher risk of credit applications being denied.

Getting, and keeping, your debt in line with recommended budgeting guidelines, is an important step in debt reduction.

Use the following recommended budgeting guidelines (the same ones used by Financial Institutions) to review the items in your budget:

  • Housing 35% - Mortgage or rent, taxes, repairs, improvements, insurance, and utilities;

  • Transportation 20% - Monthly payments, gas, oil, repairs, insurance, parking & public transportation;

  • Debt 15%* - Credit cards, personal loans, student loans & other debt payments;

  • All other expenses 20% - Food, insurance, prescriptions, doctor & dentist bills, clothing & personal;

  • Investments & Savings 10% - Stocks, bonds, cash reserves, retirement, rental real estate, art, etc.

    Debt Income Ratios

    The second step is calculating your debt income ratio. Once you know what your ratio is, you will understand just how important debt load is to your overall financial picture. Your debt income ratio is the percent of your monthly take-home pay that goes to paying debts.

    You calculate it by taking the amount needed to repay debts each month, including rent or mortgage, and divide by your take-home pay (your net pay after taxes). Remember, this is "Debt" ratio, so only include actual debt repayment in the calculation.

    Credit To Debt Ratio

    Just because you pay off a credit card is no reason to close your account. One little known fact about the Credit to Debt Ratio is the reverse effect it has on your credit score. If you pay off a credit card, and close the account, you are actually negatively impacting your credit score.

    The reason for this negative effect is in the calculation of the Credit to Debt Ratio itself. This ratio is the relationship of your debt total vs. your credit limit.

    You calculate it by dividing the total credit limit of all credit cards and loan accounts by the total of the actual debt (spent total). Now, if you pay off a credit card, you are reducing the actual debt, which is great, but, if you close the account, you are also dramatically reducing the credit limit you have, and usually by a higher percentage than the debt reduction.

    Pay Yourself First

    Essential to long-term financial success, and protecting your future, is paying yourself first. While this may seem easy to do, it happens to be the last thing most people do, instead of first. Debts and other financial obligations, money for entertainment, and other spending always seem to take a higher priority. All I can say is, STOP! Think about it, if you aren't worth being paid first, then who is? Always put something away in your savings, and leave it alone. It doesn't matter if it's only $5 a week, just do it!

    Snowball The Credit Cards

    Last, but not least, is making extra payments, not just the minimum payments, on your credit cards. You have probably already seen this many times, but it just can't be stressed enough. Paying just $10 extra a month on a credit card, above the minimum required payment, can cut your repayment term in half, if not more! So, squeeze out that extra payment, however small, every month, and take advantage of the compounding effect of snowballing your debt away.

    The Power of Financial Knowledge

    Remember, you don't have to be a financial whiz to understand what's going on with your credit and debt. Just a few simple calculations, and an eye on the future, will go a long way to help you succeed financially and keep your debt under control. Be safe, be smart, do the math!

    Related articles:

    Compare the pros and cons of debt consolidation loans, service companies, and credit counseling.


    http://www.debtsteps.com/consolidate-debts.html

    Understanding how your credit score can affect your debt relief choice


    http://www.debtsteps.com/credit-score.html

    Copyright 2004 DebtSteps.com, all rights reserved. Reprinted with permission.

    Publishing guidelines:

    Publication is permitted so long as the resource information at the end of the article remains intact, and links are live..

    Please email articles "AT" debtsteps.com providing a link to the location of the article, or a copy of the newsletter.

    About The Author

    Debs is the editor of www.DebtSteps.com where you can get the answers you need about debt relief, consolidation, credit counseling and more. Free subscrption and money management worksheets http://www.debtsteps.com/debt-help.html

    limousine chicago service
    In The News:

  • Help to Get Out of Debt

    Debt Help is the stepping stone to debt elimination and... Read More

    What Does A Bankruptcy Trustee Do?

    Once you file bankruptcy a court appointed bankruptcy trustee will... Read More

    Mandatory Credit Counseling for Those Considering Bankruptcy

    Most Americans are aware of the sweeping changes in U.S.... Read More

    Help for the Single Mother with Managing Credit and Debt

    Today's consumers benefit drastically from the usefulness of credit. Credit... Read More

    Debt Management Systems

    What is a debt management system, and when do you... Read More

    Debt Collectors: Men or Mice?

    Who are these people anyway? They viciously harass you and... Read More

    Assess Your Financial Attitude and Eliminate Your Debt Forever

    Want to know if your attitude towards your finances is... Read More

    Should You Join a CCCS - Consumer Credit Counseling Service for Debt Relief and Financial Freedom?

    Do You Need to Join a CCCS - Consumer Credit... Read More

    Five Hot Tips To Get Out Of Debt Forever

    The financial and psychological burden of being in debt causes... Read More

    The Debt Free Lifestyle

    Many people have been taught that you cannot get ahead... Read More

    The 7 Secrets to Getting?and Staying?Out of Debt

    As vice president of the American Credit Foundation, a nonprofit... Read More

    Bankruptcy 101

    Bankruptcy still remains a mystery in the eyes of many... Read More

    Bouncing Back from a CCJ

    Should you be unfortunate enough to face a CCJ ?... Read More

    Is Debt Negotiation Bad?

    Educating yourself about the ins and outs of debt negotiation... Read More

    How To Get Out Of Debt

    If you have found yourself in a position where you... Read More

    Tips For Saving Money

    Still living from pay to pay? Or envying those great... Read More

    Debt Negotiation and Debt Settlement

    Debt negotiation and settlement can give you a drastic reduction... Read More

    Debt Getting You Down? - Make a List!

    Debt is not much fun and when faced with it,... Read More

    Dealing with Thingitis

    Debt is quickly becoming an epidemic in America. However, through... Read More

    Secrets to Why Debt Reduction is So Vital for Your Financial Health

    Living with debt is never a good idea if you... Read More

    Bankruptcy As An Option

    If your financial worries are preventing you from sleeping at... Read More

    IVA Information

    If you're thinking about an IVA, it is essential to... Read More

    5 Options Toward Debt Relief

    If you are in debt, well over your head in... Read More

    Credit And Debt Relief--A One Stop Solution

    Amy Wright, 34, was extatic when her realtor showed her... Read More

    Debt Elimination 3

    Planning To Achieve Debt EliminationOnce you have started the process... Read More

    industrial led bulbs street light prices Pete's produce ..