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Debt to Income Ratio:
Keep It Within Reasonable Boundaries |
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| Even after debt consolidation, money management techniques are essential to maintain a healthy financial life. Credit Card debt can be kept within reasonable levels provided that you develop the necessary money management practices. However, money management techniques are like diets, in order to be successful with one, it must be designed and customized for the particular user. There is no universal solution as each budget is different. |
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Adjusting Debt Ratio To The Budget Distinctive Characteristics
There is a general rule that states that overall debt payments should not exceed 36% of your monthly income. However, as explained above, general rules are useless if you don’t take into account the particular differences of budgets and situations. It’s not the same someone who is paying mortgage payments than someone who is a tenant. A closer approximation would be to consider each dollar on unsecured debt the equivalent to one and a half Dollars of secured debt. |
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| Income |
2500 |
| Credit Card Debt Payments |
150 |
| Home Mortgage Payments |
500 |
| Car Loan Payments |
100 |
| Student Debt Payments |
150 |
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| In the above Chart we see an ideal situation with a 36% debt to income ratio. However, taking into account the differences between secured debt and unsecured debt, the debt exposure would raise 8% more. Nevertheless, this debt situation is still manageable. Let’s take a closer look to a more problematic situation: |
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| Income |
2500 |
| Credit Card Debt Payments |
250 |
| Rent Payments |
400 |
| Car Loan Payments |
100 |
| Student Debt Payments |
150 |
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| In this new chart the ratio equals to 36% again but taking into account that debt is unsecured and thus carries a higher interest rate, if you multiply by 1.5 we would be talking about 54%. This kind of debt exposure is risky. Yet, it is not that problematic. With a simple debt reduction program you can get back into the reasonable boundaries. |
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| As you can see, the higher the amount of credit card debt, the higher the danger. This is due to the fact that in the event of defaulting the rates applied to the debt are even higher and thus, debt will accumulate at a greater pace. |
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| The same principle that rules debt consolidation, rules money management techniques: keep debt payments affordable. This can be done either by exchanging expensive debt with cheaper debt or by spreading the debt payments into longer periods of time.
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Money Management Solutions
The key to successful money management when it comes to credit cards is to restrict their use dramatically. Unnecessary goods shouldn’t be purchased with credit cards. Instead, if you want to buy something that is not strictly necessary, try to raise the money in a savings account till you have enough to afford it. Once you have some discipline, you’ll be able to get some flexibility on this rule. |
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| Otherwise you may be tempted to resort to debt consolidation. Yet, it’s different to consolidate your debt because you have no other choice than doing it because you’ve taken the wise decision to borrow smartly. In the first case, once you obtain debt relief, if you haven’t changed your behavior, you’ll soon be making the same mistakes as you did before and next time you won’t be able to consolidate again. |
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