As of 2010, the total amount of consumer debt in the U.S. was $2.4 trillion, or roughly $7,800 for every U.S. citizen, according to the Money-Zine website. Debt problems can prohibit you from buying a house or car, getting a job and it might even impact your personal relationships. Not everyone struggles with debt, but those who do need to ask some serious questions to help resolve the issue.
What is My Debt-to-Income Ratio?
It is important to understand your debt-to-income ratio. This ratio compares your monthly debt expenses to your total monthly income. This gives you a snapshot of your current debt situation. Your debt load is typically considered healthy if your debt-to-income ratio is 36 percent or less. Anything above 50 percent means you are, or soon will be, in serious financial trouble. To calculate your debt-to-income ratio, divide your total monthly debt payments, including car, house and credit card payments, by your total monthly gross income. Or, use an online debt to income ratio calculator (see Resources).
What is My Credit-to-Debt Ratio?
Your credit-to-debt ratio is another statistic you should understand and calculate to evaluate your debt situation. This number compares your total debt load to the total available credit. You should aim to keep this number at 50 percent or less; though many lenders favor a 30 percent or lower credit-to-debt ratio, according to MSN. To calculate this number, divide your current balance by your available credit. For example, if you owe $1,500 on a credit card with a $6,000 limit, your credit-to-debt ratio is 25 percent. Improve this number by paying down debt or by increasing your available credit without increasing your debt. For example, if you increase your available credit from $6,000 to $10,000 and keep the $1,500 balance, your credit to debt ratio improves to 15 percent.
Which Debt Should I Pay Off First?
Deciding which debt to pay off first depends on your personal situation. According to MSN, the best debt to pay off first is the debt with the highest interest rate. Another approach is to pay off the debt that causes the most stress in your life first. This might be your largest debt, the debt that generates the most annoying phone calls and letters or a debt to a family member or friend that is causing a strain on your relationship. A third method is the debt snowball, which involves paying the minimum payment on all debts except the smallest debt, and paying off that debt as quickly as possible. When it is paid, you apply the amount you were paying each month towards your next smallest debt, plus the minimum payment you were already making. Continue this until you've paid off all the debts.
Should I Consolidate My Debt?
Some people choose to consolidate debt to make payments less expensive and more convenient. The debt consolidation company will negotiate lower interest rates and try to waive fees from creditors. In exchange, you pay the company a set amount each month that goes towards paying down your debt. The main advantage is that you make just one consistent payment, as opposed to several different payments. Another consolidation option is to open a credit card with a zero percent introductory interest rate. Transfer all your debt to that card, and pay it off aggressively while saving money on interest.
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