It has been said that debt is like dynamite—when used properly, it can be a useful tool to build things, but used recklessly, it can explode, causing unintended damage. Debt is not all bad. For instance, you can borrow money to get a college degree for greater future earning potential. This is an investment in yourself. Also, borrowing to purchase a home is a good example of using debt in a reasonable way.
Most people get into trouble when they use unsecured debt (credit cards, lines of credit, consolidation loans, payday loans) as a means of purchasing consumer items that they can’t afford within the means of their regular income.
Understanding the types of debt and how to use it can help you avoid pitfalls on your way to better financial health and independence.
One way to stay financially healthy is to calculate and monitor your DTI (debt-to-income) ratios. This is basically keeping track of how much you owe compared to how much you make each month. There are actually three DTI ratios:
- Consumer DTI = the total monthly debt payments of credit cards, student loans, retail stores, etc. It should generally be kept below 20%
- Housing DTI = how much you pay on your mortgage or rent. It should generally be kept below 28%
- Total DTI = your total debt payments. It should be kept below 36%
Where do you start if your credit card debt is out of control? Here are a few steps you can take to begin to get things under control. Take a deep breath.
- Stare down your debt and make an honest assessment of where you stand. Here are some worksheets you can choose from to get started. Pick one that looks doable and matches your abilities to start.
- Review your budget and look for ways to reduce expenses. You’ll be surprised how seemingly little expenses add up. For example, on average, Americans spend about $20 per week getting lunch in restaurants, or $1,043 a year. To keep your spending in check, Visa has a free app called Lunch Tracker. There is also an online low-tech calculator to show how little things add up.
- Pay more than the minimum due on your credit card balances.
- Pay off the highest interest rate debt first. Or you can use a snowball method to pay off the lowest balance first. Just pick one method and stick with it.
- Pay bills on time to avoid late fees and high interest charges.
Debt management is not easy, but it gets to be easier as you go along if you have a solid game plan. The first part of your plan must be to keep a budget. Without a budget, you are likely to end up in the same predicament you have worked hard to get out of. A realistic budget can provide motivation, empowerment and a clear sense of direction.
Sometimes it helps to work with a credit counselor. Housing and Credit Counseling, Inc is a local community partner with the library. HCCI can help you on your way to financial stability.
Below is a list of books in the Library that will be helpful also.