Sadly, debt reduction isn't usually an issue for consumers until it is too late. We hope that you are reading this article before you have taken on big debt or while your debts are still manageable. This will help to keep you safe. If you already have problems, continue to read our pay off debt, credit card debt and mortgage refinancing guides.
When a bank looks at whether to lend you money or not, it will use its budgeting guidelines to decide credit worthiness.
You should therefore also use budgeting guidelines to work out what levels of debt you should be comfortable with.
Typical budget guidelines are as follows:
Housing 35% - Mortgage or rent, taxes, repairs, improvements, insurance, and utilities;
Travel & transport 20% - Monthly payments on car or other vehicle(s), gas/ petrol, oil, repairs, insurance, parking & public transportation;
Now work out how much debt you have, versus how much money is coming in each month.
This is your Debt to Income Ratio. Obviously, the lower this ratio the better. Is the ratio more than 15%?
Do you have enough left to pay your debts once you pay for everything else?
If the answer is yes to either question, you many need to re-structure your debt repayment plan.
A good Credit to Debt ratio is positive for your credit score. This means that the more credit you have
access to, while the less debt you hold, the better. Makes sense, right?
So even though you should pay off your credit card bills promptly every month, it makes sense to keep your credit cards - even if you don't use them.
Having worked out how much debt you have, if the figure is affordable, ie if you can pay back your monthly debts and still have enough for everything else, then you are in decent shape.
However you may still be able to improve your situation by paying off debts with high interest rates first. This is particularly true for credit card debt, but can be true for some other personal loans.
If you are about to take on a new debt, make sure your debt to income ratio doesn't get out of hand with the new obligation.
If you can't support your current debt repayment plan, take a look at these factors:
1. What un-necessary expenses can I cut out?
2. Are there other ways that I can consolidate or refinance my debts? Take a look at , and to help answer that question
