Wednesday, December 12, 2012

Personal Financial Advice for High Debt

High debt can lead to stress in everyday life. Because of heavy debtloads, everyday purchases are magnified in importance, while luxury purchases, such as vacations, are virtually nonexistent. Fortunately, high debt be controlled, or at least reduced to an amount that's more manageable.

Cash

    Pay with cash. Frequent use of credit cards leads to a continuous stream of debt, which can build up to unmanageable amounts if someone cannot immediately pay back their purchases. Paying with cash forces you to spend wisely, since you'll only be able to purchase something if you have available funds.

Consolidate

    One of the fastest ways to get rid of debt is to consolidate. Consolidating means combining numerous debt accounts into one debt account. Consolidating high-interest credit card debt into a low-interest debt will help someone pay off the debt faster and without spending as much money. For example, if you are able to consolidate credit card debts of $5,000 at 20 percent interest; $7,500 at 18 percent interest; and $3,000 at 19 percent interest into a combined debt of $15,500 at 10 percent interest, you could cut into your debt quicker. Common methods of consolidating debt include taking out a personal line of credit, transferring credit card balances to a low-interest card and taking out a home equity line of credit.

Debt-to-Income Ratio

    A healthy debt-to-income ratio is 36 percent or below, according to Lending Tree. A person's debt-to-income ratio is expressed as a percentage. The percentage is found by taking the person's total monthly debt, such as loans and credit card payments and rent or mortgage, and dividing it by his total gross monthly income. A good way to remain financially secure is by keeping an eye on the debt-to-income ratio. If buying a $2,000 TV on a credit card will increase your debt-to-income ratio to 45 percent, for example, debt problems may follow.

Budgeting

    Debt occurs because a person's income cannot match her expenses. Sometimes debt is uncontrollable, such as when a person loses her job for a lengthy period of time. However, most debt can be controlled by creating a simple monthly budget. A monthly budget offers a visible list of exactly how much each expense costs and how much money is needed to pay for all of your monthly expenses.

Debt Counseling

    Debt counselors serve as valuable tools for people who cannot get their debt under control, because of poor spending habits or because their debt is too large. Debt counselors work with credit card agencies and attempt to restructure debt to a lower, more realistic amount. The counselor also assists he person in creating a budget and instilling good spending habits so that uncontrollable debt does not reoccur.

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