QUICKLY OUT OF DEBT

We’ve learned about good debt and bad debt. We’ve examined why a healthy debt-to-income ratio is crucial when applying for a loan. Now, in part four of our series, we’re going to look at the many approaches you can take to getting out of debt. Note: There is no instant cure for getting yourself out of debt. If you simply decide to default on your bills, your credit score will suffer for many years to come. Don’t shoot yourself in the foot financially. Instead, let’s look at some strategies for getting your bills paid off.

Debt consolidation is one popular choice for people who have too much debt. By combining your debt into a single monthly payment with low interest, you’re spending less money and making it easier to afford your everyday necessities. Debt can be consolidated through loans, 0% interest credit cards, or debt repayment programs.

Debt consolidation loans can be obtained through your bank or credit union. They’re a good choice for folks with a moderate debt load. If you’ve been a good customer for many years, you might still be able to secure a loan even with a high debt ratio. The point of getting a debt consolidation loan is to get enough money to pay off your debts. Then you repay the loan over a course of years, at a much lower rate of interest than your original debts (especially credit card debts) were accumulating. If you want to maximize your chance of getting approved for a debt consolidation loan, pay off some of your debt before you apply.

Another option is to move your debt to a 0% interest credit card. This is a good choice for people with less than $10,000 in debt, and with credit scores that qualify them for good cards. When you pay off your debts using one of these credit cards, you typically have one year to enjoy the 0% interest phase. For that reason, you must be certain that you can pay off your balance within a year. After that, your balance will be subject to interest – sometimes at an even higher rate than your original debt!

Those with heavy debt burdens could look into debt repayment programs and credit counseling. Just be aware that there are some organizations who will take your money and not deliver on their promises to negotiate better terms for your debt repayment. Others require you to avoid taking on more debt while you’re enrolled in the system. They’re not for everyone, but these programs have helped many deeply indebted people.

Want to learn more about debt repayment and how you can tell the legitimate programs from the swindlers? Check out our free 15-page report, ‘Know Where to Draw the Line on Debt’. It’s full of information, calculations, tips and tricks for keeping your debt in check. This report is offered to our readers as a thank-you for visiting quicklyoutofdebt.com.

In part 1 of this series, we learned why some debt is worse than others. In part 2, we took a look at what constitutes good debt and how a healthy amount of it can actually help your credit score. Here in part 3, we’re going to learn about healthy debt-to-income ratios and how they can be monitored to catch problematic trends as they emerge.

Your debt-to-income ratio is just what it sounds like: the amount of debt you carry in relation to your income. This number is very important. For one thing, whenever you go to buy a house, purchase a car, or take out a small business loan, your potential lenders will want to know how much debt you already have and whether or not you can afford to take on more. They look at your debt-to-income ratio to determine your creditworthiness.

For another thing, keeping an eye on this number helps you recognize when you’ve reached a balanced level of debt. You can then decide if more debt is manageable, or if you need to pay off some of your accounts before applying for more credit.

So how do you calculate your debt-to-income ratio? For the purpose of illustration, let’s say you make $4,000 a month in gross income. Between your rent, your car payment, student loan repayment, utilities, and other recurring monthly expenses, you have $2,000 in outgoing payments every month. That’s half of your gross monthly income, leaving you with a debt-to-income ratio of 50%.

A ratio of this size would raise warning flags in the minds of lenders. If you’re already paying out half of your income every month, can they trust that you’ll be able to squeeze in more payments? Most lenders will consider the proposition too risky, especially if you have late payments or defaults on your credit report. That would disqualify you from most loans.

Now let’s say you’ve repaid your student loan and reduced your rent and utility costs. Now you only pay out $1,500 a month in expenses, and your debt-to-income ratio is a slimmer 37.5%. This will make you appear more trustworthy to lenders, and they will be much more likely to extend you credit. 36% is widely considered the ideal ratio.

Want to learn more about calculating your debt ratio? Check out our free 15-page report, ‘Know Where to Draw the Line on Debt’. It’s full of information, calculations, tips and tricks for keeping your debt in check. This report is offered to our readers as a thank-you for visiting quicklyoutofdebt.com.

In part 1 of this series, we learned why some debt is worse than others. Using credit card debt as a specific example, we saw why consumable assets shouldn’t be purchased on credit. In part 2, we’re going to see examples of good debt and learn why it’s actually healthy for your financial future.

What do you consider a good investment of your money? Real estate? A house? A college education? These are all examples of purchases that will increase in value over time. For example, a house that costs $100,000 might be worth $150,000 within a few years. The improvements you make to the house and surrounding land will add to its value. A college education will open the door to higher-paying jobs, making it a valuable investment indeed. But what does all of this have to do with your debt?

Healthy debt is good debt. Mortgage loans and student loans are examples of healthy debt. Yes, you pay interest and lock yourself into a repayment schedule. But in the end, your returns (property value, employability) will outweigh the price of your total investment. $50,000 in student loans sounds steep, but what if that education results in a job making $80,000 a year? It’s easy to see the value of healthy debt. For that reason, it’s okay to go into debt to make these types of purchases – as long as your debt load is healthy in relation to your income and other expenses.

Mortgage loans and student loans are also known as “installment” accounts. You repay a fixed amount in regular installments. This is a good way to build a positive credit history. As long as you make your payments on time, you will cultivate a good payment record. Just be sure that your creditors report to the major credit bureaus. That will make you look good to lenders when you go in for your next loan.

So how much debt can you really afford? What looks best to creditors: no debt, some debt, or a moderate amount of debt? In part three of our series, we’ll learn how to calculate a healthy debt-to-income ratio that won’t leave you overburdened by bills.

Check out our free 15-page report, ‘Know Where to Draw the Line on Debt’. It’s full of information, calculations, tips and tricks for keeping your debt in check. This report is offered to our readers as a thank-you for visiting quicklyoutofdebt.com.