The need to resort to debt relief techniques is often overlooked by many people unless they fall behind schedule with their payments. There are ways to escape the ever dreaded debtor trap. By applying the following budgeting tips, you will be able to achieve a debt free existence.
- Budgeting is part of life. C reditors use budgeting guidelines when reviewing and approving credit. If your debt exceeds the recommended financial guidelines, then you have a higher risk of denied credit applications.
- Recommended budgeting guidelines. Keeping your budget in line is an important step towards debt relief . The following recommended guidelines are often used by Financial Institutions to review the items in your budget:
- Housing 35% - Mortgage or rent, taxes, repairs, improvements, insurance, and utilities;
- Transportation 20% - Monthly payments, fuel , maintenance , repairs, insurance, parking & public transportation;
- Debt 15% - Credit cards, personal loans, student loans & other debt payments;
- All other expenses 20% - Food, insurance, prescriptions, doctor & dentist bills, clothing & personal;
- Investments & Savings 10% - Stocks, bonds, cash reserves, retirement, rental real estate, art, etc.
- Credit t o d ebt r atio. The payments on a credit card are no t a good reason to close your account. T he Credit to Debt Ratio has reverse effect on your credit score. If you pay off a credit card, and close the account, you are negatively impacting your credit score. The reason for this is in the calculation of the Credit to Debt Ratio itself. Th e ratio is the relationship of your debt total to your credit limit. You can calculate it by dividing the total credit limit of all credit cards and loan accounts by the total of the actual debt. I f you pay off a credit card, you are reducing the actual debt, but if you close the account, you are also drastically reducing the credit limit you have, usually by a higher percentage than you are reducing debt.
- Debt to i ncome r atios. This ratio will help you understand the importance of debt load to your overall financial picture. Your debt income ratio is the percent of your monthly take-home pay that goes to paying debts. It’s calculated by taking the amount needed to repay debts each month, including rent or mortgage and divide it by your take-home pay (your net pay after taxes). Since this is debt ratio, you should only include actual debt repayment in the calculation.
- Extra payments go a long way. M aking extra payments, not just the bare minimum payments on your credit cards and installment loans, will help you achieve debt relief relatively quickly. Even a few bucks over the required minimum will help substantially.
- Always p ay yourself first . You’ve probably heard this one before. This is a rule crucial to financial success. Many people seem to always find ways to pass up this rule, and saving is not on their list of spending priorities. Try to a lways put something away in your savings, even if it's only $5 a week. This process will pay on the long term the savings will help you with your struggle with debt relief.
By Vanina Sloan