About 'debt or debts'|Too much debt or not enough demand A summary of the debate over America’s fiscal future
Statistically, Americans have high debt-to-income ratios, sometimes well over 50%, which is what causes bankruptcy and destitution. In today's society, many people feel compelled to spend and to allocate financing for whatever cannot be immediately afforded. In order to steer clear of debt - or to identify a debt problem - you should calculate your debt-to-income ratio, which is simply the percentage of your income which must go to paying off debts. Creditors calculate your debt-to-income ratio before they approve a loan for financing. They can calculate the number because, through your credit report and other investigative tactics, they can find out how much you owe each month to other creditors. This is important to them because, if your debt-to-income ratio is high, they won't want to add to that debt, thereby running the risk of you being unable to pay off the credit you are asking them to extend. According to bankrate.com, creditors avoid consumers with a debt-to-income ratio of more than 36%. If you are nearing that point - say at 32% - you might be charged a higher interest rate or be approved for a smaller loan than the one you originally sought. Mortgage lenders are particularly wary about debt-to-income ratios because a house is an enormous investment and far too many consumers default on their loans. This presents an enormous risk to lenders. Credit counselors and other experts warn against consumers developing a debt-to-income ratio of more than 20%, however, rather than the standard 36%. Once you hit the 20% mark, you are swimming into dangerous territory, and you might very well steamroll yourself into massive debt. Consumers who have higher debt-to-income ratios are more likely to pursue other areas of financing, which simply serves to compound the debt. And if you continually pay your bills on time and maintain positive relationships with your current creditors, future lenders are more likely to approve financing, which just continues to add to the trouble. In order to calculate your debt-to-income ratio, you must first determine your monthly income. This should include wages, allimony, child support, annuities and any other money that flows into the household on a monthly basis. If your paychecks vary from month-to-month, you should add up your last six months of pay stubs and average them to get a standard income. Next, you must calculate your monthly debts, which are the monthly payments on all outstanding balances. You don't need to include your monthly bills - such as phone and cable - but you should include credit card minimum, mortgage, child support, allimony, personal loan, business loan and car payments. Leave out any loans or credit balances that will be paid off within the next three months. After you've calculated those two numbers, divide your monthly income by your monthly expenses and you will get your debt-to-income ratio. For example, let's say that Sharon has a monthly income of $4,500 and she has fixed monthly expenses totaling $1,050. When you divide her expenses by her monthly income, you get .21, or 21%. Sharon's debt-to-income ration is just above that 20% line we talked about, but right now she's in the clear as far as major trouble is concerned. However, let's say that Sharon adds $200.00 per month in credit card bills, a $400.00 mortgage payment and a $500.00 personal loan to her debt. She has now increased her fixed monthly expenses to $2,150, which gives her a debt-to-income ratio of 47%, which is far too high. It is easy to see how just a few bills can exponentially increase your debt-to-income ratio, making it that much more difficult to crawl out of debt. |
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