Are you out of your DEBT comfort zone? Are you constantly worried about not having enough cash to pay your bills? Is so, this video is for you. We are going to look at the different types of debt, what is a good Debt/Income ratio and steps to improve this ratio in order to secure a comfortable financial future.
Before we do that, we are going to examine what is US Household’s Debt as a percent of our GDP? In 2008, during the financial crisis, it is 97%. In 2018, it dropped to 78%, still pretty high.
Now we are going to look at the distribution of the different types of loans. In first quarter, 2018, Mortgage is 68%, Student Loan, 11%; Auto Loan, 9%; Credit Card Loan, 6%; HELOC, 3% and Others 3%.
In terms of actual dollar amount, Mortgage is $178,000; Student Loan, $47,000; Auto Loan, $27,755 and Credit Card Loan, $16,000.
Now let’s take a look and see how you can calculate your DEBT/INCOME Ratio. Say for instance, your monthly payment for auto loan is $50, student loan, $250, Credit Card $200, Mortgage $500. Total is $1,000 and you make $5000, so your debt income ratio is 20%.
Let’s talk about the maximum debt income ratio. The 28/36 rule. Ideally, your debt income ratio should not exceed 28% of your income, or 36% including utilities and house payments.
What is a good Debt Income Ratio? Anything under 10% is excellent. Between 10 and 20%, you have margin to take on more debt. If over 20%, you will find it quite stressful!.
Now we are going to talk about how to PAY DOWN YOUR DEBT.
First, you need to understand that there are two types of debt: Secured, which has liens on it such as your mortgage and your car loan. And non-secured such as your credit card debt and your student loan.
You need to be careful. For secured debt, when you are behind, someone might take away your asset. For non-secured debt, your future borrowing ability and your credit scores might be affected, but nothing worse.
There are two ways to pay down your debt. One is called the “Snow Ball” method and the other is called the “High Interest Rate”. They are adopted for different reasons and really depends on your preference. But one thing for sure, it TAKES HARD WORK, so stay committed.
Let’s talk about “Snowball” method first. It is about paying off small balances first. That leaves you with less bills to take care of and gives you immediate satisfaction.
The other is called the “High Interest Rate” method. You pay off the higher rate or the most expensive loans first. Then work your way down.
Whatever you do will entail some type of lifestyle changes. You would need to find new revenue sources by picking up a part-time job or cut out non critical expenses, such as start bringing lunch, give up your car, delay vacations and major purchases.
So get it done! I’m so PROUD OF YOU!!!
The other thing you might want to consider is call your creditor and negotiate terms. Explain the reason for your hardship such as the loss of job, health, family etc. and ask for an extended term, a lower interest rate or even forgiving some part of the loan in order to incentivize you to pay up sooner.
There are other solutions such as Loan Consolidation, which is put all loans together under one umbrella and try to negotiate for a lower interest rate. However, you need to consider terms and origination fees. If you don’t think you can deal with it, then file bankruptcy, but that information will be on your record for 10 years which could affect your credit and future job opportunity.
Another option is to seek for Debt Counselling. Look for Qualified Credit Counsellor under Federal Trade Commission’s website or Non Profit Credit Counselling Agency listing under National Foundation for Credit Counselling.
Finally, as you are trying to fix your credit, also check your credit reports to ensure that the positive steps have been recorded. Also understand the ramification of term extension. Although you have more time to pay off your debt, you are incurring more interest and also in debt for a longer period of time.
Thank you for watching Financial Wellness Tower’s “Debt Management.” Good luck to a clean credit. For more learning, please go to www.FinancialWellnessTower.com. Start the learning and the wealth will follow.