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
MORE RESOURCES:
5 Options Toward Debt Relief
If you are in debt, well over your head in debt that is, there are options to help you overcome this situation. Let's examine five possible responses and uncover which ones lead to true debt relief.
Purchase Your Future Now While It Is Still Inexpensive
Leaving school, getting a new job, or even a raise at your current one, has most people considering their next great purchase. Few think about the affect this could have on their future.
Senate Passes New Bankruptcy Law
The United States Senate passed a law on March 10, 2005 that changes the bankruptcy laws in America. It is expected that the House of Representatives will look to pass the same bill in April, which will send it to President Bush for his signature.
IVA Advice
An IVA (individual voluntary arrangement) is an alternative to bankruptcy introduced by the government as part of the Insolvency Act 1986. This article provides an overview of IVAs and suggests what readers should watch out for when looking for IVA advice.
New Bankruptcy Law - Targeting the Wrong People?
Last April, President Bush enthusiastically signed into law the oddly-named Bankruptcy Abuse and Consumer Protection Act. This bill, representing the biggest overhaul of bankruptcy law in twenty-five years, was written in order to discourage "bankruptcy of convenience.
Creating A Realistic Budget
Budgeting -- ooh, what a scary word! If you want to frighten someone whose finances are out of control, suggest that they tally up their expenses on a piece of paper. We all understand the value of such an exercise, but when it comes to the practicality of putting a budget together, we get cold feet.
Help to Get Out of Debt
Debt Help is the stepping stone to debt elimination and financial recovery. Debt help analysis guides you to save thousands of dollars in interest charges.
Debt Problems? You Can Negotiate With Your Creditors
It is always possible to negotiate with creditors - even if they have already taken you to court to get a judgment or to garnish your wages.Getting a creditor to reduce your monthly payment helps and does provide short-term relief.
Bankruptcy - Your Fresh Start
Most American consumers are living too close to the edge. They are carrying too much credit card and mortgage debt and have too little in the way of savings.
How to Choose a Debt Settlement Company
As consumer debt continues to spiral out of control, debt relief is fast becoming a major concern for many American's. In 1999, American's made $1.
Can You Escape the Trap of Ever Growing Debt?
It's difficult not to be concerned when facing numbers like these:43% of U.S.
5 Ways to Get Out of Debt
It has been said that everyday more and more people in the world are getting into unsecured debt. Once reason for this is the relative ease in which credit card companies and banks are extending credit to their customers.
5 Methods Toward Reducing Your Debt
Decreasing your debt is paramount to having a good credit rating as well as giving you peace of mind. You want to get out of debt, but not all debt reduction options may be beneficial.
Tips For Saving Money
Still living from pay to pay? Or envying those great wealth accumulators and wondering how they did it? Every month you make a resolution of saving some dollars from your paycheck, but only end up breaking it. Looking for some magic formula for saving money?Well, there’s no magic formula—only some simple rules to be followed with determination and persistence.
Debt Validation: Do you have to pay ?
It happens all the time. Debt collectors try to collect on debts that consumers have no knowledge of or never owed in the first place.
How to Get Money When You Are Broke
(Money You Don't Have to Pay Back) 1. One way to get money is to have a yard sale and sell itemsthat you are getting ready to toss away because you don't wantthem any longer.
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.
Debt and Your Dreams
You may not realize what that credit card bill is doing to you?Bob is a 27 year old truck driver. He dropped out of college after one year and got a job.
The Bankruptcy Code Acknowledges the Validity of the Homestead Exemption
Many times the subject of bankruptcy seems baffling in its complexity. Actually the basic principals of bankruptcy are fairly simple even though the federal statuses on bankruptcy are extensive.
Reduce Your Debt With These 5 Tips
It's never pleasant to realize that you're in financial hot water, but pretending the situation doesn't exist is NEVER the way to deal with the problem. If you're having trouble meeting monthly payments, find yourself borrowing or using credit cards to meet daily expenses, or have one or more of your credit accounts turned over to a collection agency, it's time for you to get proactive and bring your debts back under control.