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

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.

What to do to Avoid Risks of Rising Student Loan Debt

Recently, the student loan debt exceeded $1 trillion for the first time ever and as a result, Americans have been struggling more than ever. Moreover, based on a report by Project on Student Debt, the average student loan debt in Florida is increasing faster compared to any other place in the country.

However, there are still options you can choose from to prevent yourself from being drowned with student loan. According to Karen Carlson, director of education for InCharge Debt Solutions, which is a consumer credit counseling service based in Orlando, to avoid an unpleasant state, you can look for some advice at the start.

In addition, Carlson said that taking on a large amount of student loan debt might lead to a financial disaster, especially if you already have previous debts, get laid off, encounter health problems, or other unprecedented circumstances.

One of the best ways to avoid being trapped in student loan debt is to have a savings plan even prior to the initial college bill. Several people utilized tax-exempt educational-savings accounts, but they are less favored these days because of poor returns. In turn, others rely on Roth IRAs, which let you take out principal tax-free if it’s going to finance educational expenses.

According to Dennis Nolte, financial planner at Winter Park and senior vice president at Capital Guardian Wealth Management, the public must have a comprehensive strategy to handling college expenses, in order to lessen their dependence on student loans. For instance, they must compare different schools or do a cost-benefit analysis of courses based on their income potential in the future.

Also, parents must encourage their children to take part in the financial planning process as early as possible, so that it will be instilled in their minds that they should work and save money for their college education, and also set definite goals to achieve later on.

Assistance Programs for Refinancing or Buying a New House

In terms of refinancing or purchasing a new house, there has been a wider range of options compared to the past for consumers who have little or no equity in their homes or who have experienced some financial problems.

Homeowners had a few or no option in refinancing into a loan with a low interest rate after the fall of home prices during the middle of the year 2007. Moreover, homeowners who lost their homes had to wait for a long time to buy a new one.

However, throughout the previous couple of years, there has been a development of several government assistance programs. Also, in the private sector, programs that are intended to assist consumers who encountered financial difficulties are being offered by banks and credit unions.

According to the president of residential lending for Zions Bank, Kim Casaday, only a few people are aware of the available resources. In fact, a free counseling is being offered by Zions for Utahns in order to assist them in terms of homeownership. Options for homeownership can be checked in Zion’s website, Thehomeownerscafe.com.

One of the major assistance programs is the Home Affordable Modification Program (HAMP). It helps consumers get a lower mortgage rate, lower monthly payment or other kinds of assistance to avoid losing their homes.

Another assistance program is Home Affordable Refinance Program (HARP). It helps homeowners who are not late in their mortgage payments but are not able to refinance due to the fall of home prices.

On the other hand, Utah First Credit Union is offering a no-wait housing loan intended for those who are not eligible for conventional financing. Consumers can apply for loans with a maximum of $320,000, and they may apply immediately after their short sale, foreclosure or bankruptcy. However, those who are qualified for the loans will be charged a higher interest rate and must have a 20 percent deposit.

401 (k) Too Expensive to Pay Off Current Debts

If you are 27 years old, married,and an expecting mother; you may have encountered a situation where you have a credit card debt of let’s say $20,000 that has a high interest rate, 9.5%. The amount is killing you and you would like to pay it off with your sitting 401 (k) deposit in the bank, but the question is should you withdraw all or a few amount of your 401 (k) savings to pay off the liability?

Well, the answer is “no”, here are the reasons why you should not touch your money in the 401 (k) to pay off your debts: first, there is an instant cost involved you pay income tax and a penalty of 10% if you withdraw an amount from your 401 (k) savings. So for example you have a $10,000 savings in your account, it could decrease your balance by 25% from $10,000 you might only have $7,500 dollars left, or less.

Another reason is, withdrawing from this account will affect you dearly in the future. If you withdraw the money, there is a chance that you might not be able to get the long-term growth of your 401 (k) amount. Your $10,000 is going to grow 6% every year for 35 years, and by the end of those years, your money would have grown into $76,861. If you withdraw $1,000 from your account, you will be losing $7,686 in the future.

So what should you do to pay off your excruciating debt? The best remedy is to sit it out with your partner. You and your husband must work out a plan and promise each other to handle your family’s finances more wisely and create a budget and think of ways to make your future financial problems manageable. Paying off all your credit card liabilities is just one of the many stages you must go through in this plan.