We all manage to run up our credit cards, but really never have a plan in mind on how we are going to reduce and eliminate the debt. By the time we realize what we have, we are already in over our heads. But, this does not have to happen if you use a few calculations you can know when your debt is getting out of control. Take into consideration these bills and the percentage that they absorb or your income, they are:
• Housing takes up a vast majority at 35%; this is mainly the mortgage or rent
• Next is your transportation at 20% and is usually composed of the car payment, insurance, and gas
• Miscellaneous debt should fall around 15% and these are your credit cards and any and all loans
• Miscellaneous expenses like food, other insurance, medical needs, clothing and so forth is around 20%
• Investments and savings is there is even anything left comes to maybe 10%
What many creditors will be looking at is your debt to income ration. When your debt is more than 50% of your income creditors become nervous, mainly because an unexpected emergency or problem could easily push that number up to 60 or 70% or higher. Leaving you with very little money for essentially needs like food and clothing. Which means you will be more likely to default on your loans or debts to meet those basic needs first. Also, many times your debt to income ratio is based off of your gross yearly pay and not your take home pay. Keeping that in mind will help you determine just how much you should be spending.
Always checking on your credit to debt ratio is important because for example, if you paid off a card, do not close it. Closing the card will bring down your credit score, because the score is comprised of your total debt, along with the length of credit history. Closing a card could actually increase your credit to debt ration and/or shorten the length of your credit history. To figure out the ratio is by totaling all your credit limits and loans and divide by the actual amount spent in total. After paying off a card the debt has been decreased, but closing it will also substantially decrease your available credit.
Learning on to handle your credit and debt before it gets out of control will do a lot more good, then trying to take care of things after they have gone too far. A few ways to do this are:
1. Teaching personal finance as early as Jr. High and High school… Teaching kids then will stop many from making financial blunders later on.
2. Learn to save instead borrowing every time there is something you want. Cutting back on other expenses and saving will get you the item you want and keep you out of debt.
3. Realizing you don’t need everything that is advertised to you. Buying the latest and greatest is fun, but can become a waste of money. Stopping yourself from buying unnecessary items just to have the newest will save you money.
4. Consider buying some items from thrift stores or outlet malls. Items that depreciate in value like electronics can be purchased for half the price they are at retail stores.
Once you have implemented some of these techniques and you will on your way to be debt free. Instead of following the crowd and living with mounds of debt, break the cycle, get out of debt and stay out permanently. Anyone can do this; you don’t have to have a degree in finances to figure it out. Some extra effort and thought and you’ll have the financial freedom you’ve always wanted.
