debt management Archives

Assess Financial Standing Through Debt-to-Income Ratio

Assess Financial Standing Through Debt-to-Income Ratio

Since November 2007, credit card debt has reached its highest ever. According to recent statistics from the Federal Reserve, an increasing number of consumers rely on credit cards for purchases since revolving debt increased by $8 billion, which in turn increased the overall credit card debt to $870 billion.

The trouble with credit card debt is that it can instantly become unmanageable. An increase in credit debt means a corresponding increase in monthly payments and the amount of debt accumulates even further.

If you observe that your credit card bills are increasing, start keeping tabs on your debts and finances. One tool that can help you is your debt-to-income ratio, which gives an accurate measure of your financial status and shows the relationship between your debt and your income.

To compute for your debt-to-income ratio, just divide your total monthly debt by your total monthly income and multiply it by 100. Next, the following ratios provide an assessment of your financial status.

If your ratio is lower than 36 percent, then you have a good financial standing and must maintain at this level by building your savings and making investments.

If your ratio is between 37 percent and 42 percent, then you have an acceptable financial standing but must still strive to cut down your debt. Try paying above the minimum amount required on your credit card bills so that it will decrease your debt more rapidly.

If your ratio is between 43 percent and 49 percent, then you are in the verge of financial trouble and must take corrective actions to immediately manage your finances. Consider balance transfers or debt consolidation loans to remove your outstanding debt.

If your ratio is 50 percent or above, then you have a financial problem so you must ask for assistance. Consider a financial planner or seek help from a credit counseling agency to discuss your options.

Costly College Loans as Bad Debt

Costly College Loans as Bad Debt

With more than $1 billion loans, the college loan debt has recently exceeded the credit card debt. Since borrowers cannot get rid of college loans, even in bankruptcy, these can be carried to their Social Security. The following is an explanation of how college loans can be a bad debt.

At present, student borrowers tend to be immature in terms of loans so they take on too much debt than they can afford. Fortunately, the Obama administration created a program that encourages colleges to ask the students answer a “shopping sheet”, which shows the actual cost of the debt.

According to Dawn Lockhart, CEO of Family Foundations, this program is a great idea. Family Foundations is a nonprofit organization that offers good consumer services in relation to credit counseling and has a history of excellent community service.

Lockhart added that the proposed checklist of college costs will be much better if it includes options on possible careers that indicate the likely income the student can expect to earn. One of the factors that can help lenders in deciding what loan to give is the income of the profession the student is pursuing.

For the moment, President Barack Obama has suggested using federal funding as motivation to encourage colleges to cut down on their costs. The president will be declaring Race to the Top, a new contest that grants funding to colleges that minimizes their costs.

Based on figures from the Wall Street Journal, student loan rates begin at around 5 percent. Consequently, families rely on other means to pay for college expenses, for instance, installment plans, low interest loans from colleges, home equity loans, and insurance loans.

However, it’s sad to know that college loans are now considered as bad debt to the extent that the nation’s top financial newspaper is trying to find ways to avoid them.

Less Debt More Uncollectable Accounts

Less Debt More Uncollectable Accounts

The debt of Americans is continually decreasing these past few years. From an average of $16,383 two years ago, it has fallen to only $14,517 this year. This has nothing to do with financial discipline, and certainly this is not very good news for the industry.

The decrease in the rate in 2010 was due to the uncollectable amounts that were write-off by the companies, and this may be the case for 2012.

It has been nerve neither racking for consumers that the rate of debt is not going down nor showing signs at all. Credit rate has continued to stay stable in 2011 and has not made no signs of change ever since. The largest decline in credit occurred in 2010 but the two years that followed did not follow its trend.

The only hope for consumers is the fast recovering economy of the United States from the recession it suffered from in 2008, and the fact that more credit lending companies are more open to lend to customers even if they do not have a spotless credit history. Furthermore, the high employment rate continues to boost the confidence of lenders.

But this current trend in the lending business poses a threat in the future. The more the economy becomes progressive, the more these financial intermediaries will take on risky decisions. This will lead to the eventual rise in the debt rate again. It is an unavoidable cycle that once too much debt is made, and then the economy will surely fall again.

As all of you might now, the top three debts that American households endure are housing loan in first place, followed by student financial loans in second and credit card liabilities in third.

Debt occurred by student loans make out a total of $1 trillion. Though credit cards could be a very hard deal, student loans are imposing a very high threat in the economy. The US president Obama is trying to get legislators to sign a law to address this problem, and hopefully they succeed.

Credit Card Holders Reached The Highest Percentage Yet

Credit Card Holders Reached The Highest Percentage Yet

A surprising twist has occurred in the credit card industry as more clients turn to credit card companies for loans. Customer borrowings surged up to $21.4 billion just as the month of March was about to end.

The percentage of credit card loaning and the amount of dollars loaned has reached its highest amount in March, breaking the November 2001 record. However there has also been a puzzling increase of $5.2 billion in the amount of revolving debt. This may be due to the downtrend of credit cards since the recession; the limited number of cards has also limited clients’ purchases.

Analysts still find it difficult to interpret the data that they have gathered about the sudden surge of credit card in March. Does the data indicate that customers are now more confident financially to get credit cards or are they in need of the cards to pay for their loans?

According to experts, in this stage, it is too early to tell what the customers are thinking. A little more time and credit data will be needed to truly understand the flow of the market today. In a few months, study will be able to answer if the Americans have truly recovered from the recession or are they still struggling through mortgages, unemployment and other unsettled accounts.

A recent research conducted by the Conference Board, the February and March data included an increase in the percentage of clients who are confident that their incomes will be increasing in the coming months. This is an indication that people are willing to borrow if they are expecting a larger amount of pay in the future.

On the other hand, an increase of 0.5% in the hourly pay has occurred in the last 3 months; also an 8.8% has hiked in the price of gasoline and a 0.9% inflation rate increase. To keep up with their lifestyle, some households have to borrow from credit companies.

But good news from the Energy Information Administration has burst out his week, gasoline prices will not exceed $5 a gallon, as analysts guessed. The price will be $3.70 per gallon in the summer.

Not All Debt is Bad – Some Debt can Help Improve Your Financial Condition

Not All Debt is Bad – Some Debt can Help Improve Your Financial Condition

All types of debt can be seen in a mortgage business. Debt payments for car loans, student loans and IRS payments, alimony, child support are made when you engage in a mortgage. Too much debt and having no debt can be both a big problem.

It sounds strange that having no debt can be a problem. It can be big problem because the lenders are looking at the borrower’s credit history before granting him mortgage. The lenders want to see the manner of your payment whether it is delayed or on time. If you have no debt then you can show no credit record to the lenders and more likely you will not be able to get a mortgage.

If you have never had a credit card or any payment for a loan then lenders have no way of checking your credit history and you just might end up keeping on renting instead of owning a property.

So what you should do is to apply for a credit card as soon as possible. You start with one credit card. It does not have to be an American Express Gold Card. It can be any card for a start that will allow you to purchase any item and to be charged to your account. Then pay on time when the bill comes. Do it consistently for several months and then apply for Visa or MasterCard later. When you have your Visa or MasterCard, do the same thing. Purchase small items and when your bill comes, pay your dues on time.

Do not apply for a bunch of credit cards at one time. Get a card one at a time in a couple of months and limit it to only three. Make sure that your payment is on time because one late payment can do damage to your credit score and it might be the reason for the disapproval of your application for mortgage in the future.

Having a debt has also its merits. It is not a problem at all times. Let me cite an example. Having a mortgage can provide you earnings. If you purchase a home at $350,000 and the home appreciates at a conservative rate of 2 percent per year then in one year the home is already worth $357,000 or in five years its value is $386,000. In addition to this you can reduce your federal tax liability. How does this work? If the home you purchased is worth $350,000 and you borrowed $315,000 at 4 percent interest, you can deduct $12,000 from your income which will result to a reduced federal tax liability. Debt can be a good investment. It can help you improve your financial situation.

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