If you’re being harassed by debt collectors, you don’t have to take any test to know whether or not you have too much debt. You know you have too much debt. However, you may be in a sort of borderline situation where you think you might have too much debt but you’re not sure.
The debt-to-income test
There is a very simple test that can tell you whether or not you’re carrying too much debt. All you need to do is determine your debt-to-income ratio. The way you do this is first add up all your monthly income including your net salary, your partner’s net salary (if applicable), any bonuses or commissions and any other revenue you earn on a regular basis. Next, add up all of your fixed monthly debts such as your mortgage or rent, auto payment, credit card or personal loan payments, auto insurance and so forth. Finally, divide your total income into your total debts. This will give you your debt-to-income ratio.
A good ratio
Let’s say that you have total monthly income of $5000 and total monthly debts of $2400. This would yield a ratio of 48% – which would be much too high. Most financial experts say that a good ratio is 35% or less.
What to do if you have too much debt
If you’ve been making only the minimum monthly payments on your credit cards the first thing you would need to do is increase your payments. The credit card companies really love it when you make only your minimum monthly payments. In fact, their entire business plan is built on this. Check out your minimum payment versus your interest charge for the month. If you’re typical, they’ll be identical. This means if you make only the minimum payment, you’re paying only your interest charge and not reducing your balance by one cent. Your credit card company loves this because they can charge you the same amount of interest every month practically forever. As an example of this, if you owed $5000 at a 20% interest rate and made only a minimum payment of $50 a month, you would literally never get out of debt. If you increased that payment to $100, you would eventually get out of debt – but it would take you more than nine years.
Dealing with debt through debt consolidation
There are three very popular ways to get out of debt through debt consolidation. The first is to borrow money and pay off existing debts. This is often called a debt consolidation loan though it usually comes in the form of a second mortgage, a homeowner’s equity line of credit or a refi. A second option for consolidating debts is through consumer credit counseling. This is where you work with a credit-counseling agency that reviews your finances and helps you develop a plan for paying back your debts. Once your creditors agree to your plan you won’t be required to pay them. You will send one check a month to the credit-counseling agency and it will pay your creditors. Most people who go through credit counseling become debt free in five years.
The third and best option
Both a debt consolidation loan and consumer counseling can help you deal with your debts. But neither will reduce them. If you owed $20,000 in credit card debts and paid them off with a debt consolidation loan, you’d still own $20,000. And the same is true of credit counseling. The third option, debt settlement, is the best option for dealing with big debt because it’s the only program that can reduce your debts to help you get out of debt faster. In fact, our debt settlement partners have helped our clients save thousands of dollars and become debt free in 24 to 48 months. Plus, we offer a simple 100% satisfaction guarantee – that if you are unsatisfied with our recommended debt relief programs you can cancel at any time and there will be no fees or penalties.
Don’t drown in your debts. Contact us today for more information about debt settlement.