Debt limits what you can do with your finances. Instead of using money to build your wealth you are paying interest payments on loans to someone else. Debt payments also make it difficult to start your own business or to save money for a down payment on a home or a dream vacation. Learning to manage your debt and pay it off will free up your income for the things you want to spend it on.
Assess Where You Are
It is important to know exactly how much debt you have and how long it will take you to pay it off. You do not need to include your home in this calculation, although some people do. All other debt including car loans, student loans and credit cards need to be included. Add up all of your debt to find out how much you owe to other people. You can also add up the amount you pay in debt payments each month. Another interesting number is the amount you pay in just interest each month. This number can motivate you to take control of your debt and pay it off.
Debt-to-Income Ratio
Many lenders will look at your debt-to-income ratio to decide what your current credit risk is. To find out your debt-to-income ratio, take your monthly debt payments including your mortgage and divide it by your gross monthly income. If the number is greater than 25 percent you need to work to reduce your debt. If it is more 40 percent you need to take action now to get your debt numbers down.
Debt Payment Plan
The best tool for getting out of debt is a debt payment plan. Write down your debts in order from highest interest rate to lowest interest rate, with the total amount owed and the minimum monthly payments you need to make. Find extra money in your budget to apply toward debt. Then apply all of the extra money toward the first debt on your list. When you pay it off, move it to the next debt on your list, applying the extra money and the first payment amount to the debt. This will help you pay off your debt more quickly than paying a little extra on all of your debts.
Be Careful of Debt Management and Credit Counseling Services
Many credit counseling services and debt management companies promise to help you get out of debt, but the companies often go out of business in the middle of your plan. Some do not pay your monthly debts and end up lowering your credit score, because they try to negotiate a lower settlement amount. You can do nearly everything a credit counseling service does by contacting your creditors and asking for lower rates or payments. If you do decide to use this service check your company with your Better Business Bureau to be sure they have been open for several years and have no customer complaints.
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