Debt Management

Debt is a major source of stress for a large number of consumers. More and more consumers are turning to debt relief services to get their debt under control. And even with the tighter restrictions on personal bankruptcy, people are still filing.

Debt is not such a bad thing in and of itself. It is simply an agreement where you borrow money from another to get the things you need and want and you are duty bound to repay it. In fact, debt can be a good instrument for consumers to finance major purchases such as a home or automobile.
The problem lies in accumulating too much debt, as a result of unexpected major expenses or money mismanagement because once you are deep in debt, it becomes harder and harder to get out of debt.

By educating yourselves about money management and determining the safe level of debt based upon your income, you can avoid falling into a debt trap in the first place. And if you're already deep in debt, there are steps you can take to reduce it.

7 simple personal debt management tips to help you manage your debt:

1. Bad debt versus good debt

2. The safe level of debt

3. Signs that you're too deep in debt

4. Getting your debt under control

5. Ways to pay off your debts

6. What if you're too deep in debt?

7. Build good spending habits



Bad debt versus good debt
Yes, there is such a thing as good debt but only a few types of debt fall into this category. Here are some examples of good debt:

Home loans - In addition to many other benefits, owning a home is a good debt because a home is an investment that gains value.

Student loans - Getting a college or graduate education is a good debt. By earning a degree, you put yourself in a position to earn more money over your lifetime.

There are lots of bad debt types. Here are a few examples:


Credit card debt - The majority of credit card purchases are things that lose value.

Most personal loans - Personal loans are bad debt because they are often taken out to finance purchases of things such as appliances, furniture, and vacations -- none of these things appreciate in value.

Now that you know about bad and good debt, every time you take out a loan it is important that you understand its implications to your life. Just because a debt is a good debt, that doesn't mean it can't always get you into trouble. Just make sure that it is still at a manageable level and you do not borrow more than you can comfortably pay back.

On the other hand, you shouldn't always avoid bad debt. There's no harm in taking on some bad debt to get the things you need and want. Only using it for things you really need.


Your safe level of debt - debt ratio
The safe level of debt depends on your income, your bills, and how much money you need to save each month. But in general it's best to keep your total debts under 35% of your income.

Bad debt expenses are one important part of your monthly expenses. Try to keep it under 10% of our income as anything higher is a sign that you may need to reevaluate your finances.

You can calculate your bad debt expenses by adding up your monthly credit card payments, auto loan payments, and any personal loan payments. You can then get your debt to income ratio by dividing that number by your monthly income and multiply by 100.

You can also figure out your total debt ratio by adding in your student loan payments, mortgage or rent, and any other monthly obligations you have, divide by monthly income, and multiply by 100.

Is your debt ratio under 35% of your income? Whether or not you're at a safe level of debt learn from the following signs to take some actions.

Signs that you're in too deep in debt

Figuring out your debt ratio can give you a good indication of where you stand. But sometimes you know that you're in trouble before you even get the numbers. Even if you are in a safe debt level, your financial situation could still put you at risk. Here are some of the signs:

You're only making the minimum payments on your credit cards each month.

You charge more than you're paying each month.

You're approaching your credit limit.

You're not sure just how much you owe -- it is usually much more that you thought.

You cannot get a loan -- if you can get one you need to pay extra fees or higher interest charges.

You're making late payments, or missing them altogether.

The above signs can be the early or later stages of a problem. If you are starting making late payments, you've probably already in too much debt. It's time to start looking at your options for getting out. If you take some actions today, you still have a chance of turning things around before it's too late.

How to get your debt under control
You can often get things under control without any outside help, if you have a plan. It takes lots of discipline, but it's doable. Here's how to do it:

Put your credit cards away and don't get new credit.

Find ways to cut back on your spending. Do you make unnecessary spending for things you can live without? Write these things down.

Create a monthly budget. Make sure you include all of the necessities but leave out anything that you can live without from the list.

Figure out how much you can set aside. Split this for credit card and loan payments as well as savings.

Stick to that budget! If you can find ways to cut back, put the money you save toward paying off your debt.

Ways to pay off your debts
Now that you can set aside some money toward paying down your debt you might want to figure out what to pay off first. Just prioritize your debts and pay the most important off first, then go down the list until it's all paid.

The first debt to pay off is secured debt. This debt is secured by your assets like your car or home. If you don't make your payments for these on time and in full, the lender can repossess or foreclose. You could lose your assets as well as damage your credit.

As home loans have lower interest rates you want to postpone paying them off until you get rid of debt with higher interest rates. Just be sure to pay at least the minimum payment each month.

You could put all of your extra money toward paying off your auto loan as this will help you get rid of a secured debt. And make sure you pay your secured loan off, if you have another one, before moving on to the unsecured ones.

Now, pay your unsecured debts starting with the highest interest rate to lowest. Make the minimum payments on everything except the one with the highest interest and only move on to the one with the next highest interest rate once it's paid off. Repeat for the other unsecured debts.

Do you have any medical bills? If so, then these should be your next priority. If you owe doctors whose services you need on an ongoing basis, move this up on your priority list.

Family and friends who you owe money are usually more patient than other creditors. And if you have a mortgage payment, now is the time to pay extra on it.


What if you are too deep in debt?
What if you've tried to make a budget to pay off your cards, but don't have the money to pay them off? Here are a few options to get out of debt:

Make more money. Try to get a second job or search for a better paying one. You can also make extra money from home, such as babysitting or doing direct sales.

Negotiate with creditors. Some of your creditors may be willing to forgive late fees and reduce interest or minimum payment.

Consolidate your debt. Home equity debt consolidation loans are often used to reduce interest charges and monthly payments. Alternatively, you can get a credit card with a high credit limit and lower interest rate to transfer your existing balances.

Hire a debt counselor. Through a debt management program, a good debt counselor will negotiate with your creditors on your behalf to lower interest charges. You will then make one payment each month to the agency, which sends the payment to each of your creditors.

File for Bankruptcy. Chapter 7 wipes all of your debts clean and Chapter 13 sets up a payment plan to pay off your debt. Either type will stay on your credit report for 10 years.


Build good spending habits
While you're paying off your debt it is important that you develop good spending habits. Here are the things you could do:

Once your cards are paid off close your accounts except for one with the lowest interest rate. By using it sparingly you will learn when is the best time to charge it and you can also improve your credit rating. Also, keep the credit card for emergency only.

Anytime you go for shopping always shop around for the best deals. If you always compare several options before you choose one you save a lot of money in the long run.

Paying cash for everything. Except for major purchases try paying cash for everything. Make a promise to yourself and other family members that you will only buy things when you have cash in hand and they are a priority on your buying list. This will reduce and eliminate your impulse purchase habit.

Pay your debt off as quickly as possible. If you have to finance your purchases with credit pay off your debt as much as you can afford. Also, remember to pay off your credit cards balance in full each month.

Developing new spending habits require persistence efforts. If you persist you will develop self confidence in controlling how you use money. You can keep your debt under control as well as keep your credit reports in good shape. If it continues, you can live in a less stressful, debt free life.

Best of luck with your debt management.




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