Reducing Debt Before It's Too Late
It usually isn't a high priority for people until they have already gotten
into trouble with overspending.
Reducing debt is easy using a few basic guidelines, and debt calculations,
to help you see when your debt load is getting into the danger zone. Learn
how to avoid the pitfalls of creeping debt.
Budgeting Guidelines
First off, 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 reducing debt.
Use our
budgeting guidelines (the same ones used
by Financial Institutions) to review the items in your budget.
Track Your Spending
Setting up a budget doesn't mean you are tracking your spending. All a budget
does is provide a guide to use for your spending, the question is ... what did you actually spend?
Keep receipts, make notes of spending, and track it so you can see what you
actually spent, then compare that regularly with the amounts in your budget. You
could get a serious shock! But don't panic, just adjust the budget, reduce expenses,
and/or increase income to get things back on track.
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 close the account. If you pay off a credit card, and then close the account, you are actually negatively impacting your credit score.
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 method to reducing
debt 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 way to reducing debt.
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!
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