Get out of Debt: Three Great Ways

So, it’s the Holiday season, and the gift budget has been blown on presents! Nothing wrong with that! Just a reminder: When you’re done with the Holidays, when buyer remorse passes, when you’re thinking about ways to drop those extra pounds, remember there are ways to tackle money problems, too.

What is debt?

Debt comes in many forms, depending on who you owe it — that defines it. For instance, the government IRS takes money out of your paycheck and demands payment at the end of the year if you don’t cover the total. Other government entities might charge you things like property tax and pay you a bill yearly. With taxes, it’s usually a cyclic payment you owe. But technically, tax liability is money you owe.

The money you owe to a financial institution includes loans you took out from a bank or other institution. In this instance, a customer goes to a lending institution and asks to borrow money, and if the creditor institution borrowed the debtor money, that debtor owes a debt. So, it’s bank loans, mortgages, and credit card debt. It also includes loans from friends or families.

You also owe people like landlords, service companies like smartphone providers, and utility companies like your electric and heating bills. You must pay up when you get a bill from any of them.

Is Debt Good or Bad? 

This value of debt is entirely debatable and often comes down to an opinion. If you’ve never experienced hassling phone calls, letters demanding payment from creditors, or other collection forms, you may think owing is excellent. It allows you to do things you otherwise couldn’t do because you can’t afford to.

The official view of debt is that it’s a good thing because a consumer really exists, or they’re even existentially real when they borrow money, do some fiscal activity, and pay their debts. But if you’ve ever had to grab a shovel to dig yourself out, you may opine that all debt sucks, whether experts consider it good or bad.

But the problem remains: How do you get ahead if you don’t borrow money to buy things like a home, a car, or a business? You should save as much as possible, but even with savings, most people can’t afford more than a down payment on big purchases. So, as long it isn’t a problem, we compromise and declare it “okay” debt: Neither good nor bad.

When is Debt a Problem?

A budget can reveal the problem. This is all the more reason to start or download a budget app! A budget communicates the awful truth. Owing money can be boiled down to a percentage, a mere number, your DTI number, and it’s a great way to look at it.

The percentage most often given as acceptable is 30% DIY number, which is represented as money you owe. This debt you owe monthly includes your rent, phone or utilities payments, credit card debt, mortgages, car payments, personal loan payments, and loans from friends and family. Some people think you can have a 35% DIY and still be fine, but you should check with your financial advisor or call your lender to get an accurate idea.

That’s not a credit limit number. To calculate your DTI, the number you begin with is your monthly income. If you make $100,000 in household income, you could carry some debt, like credit card charges, car payments, mortgages, or personal loans.

Your Budget and Your Debt-to-Income Ratio

This debt-to-income ratio starts with bringing your budget to bear on your financial picture. This is the number a lending institution looks at to determine whether you can take on debt, so if a bank says you shouldn’t take on more debt, you have a debt problem. 

You can figure it out yourself, too. Just take the monthly income number from your budget and the monthly expense number. 

Then, divide your debt number by the income number, and you’ll get a number with a decimal point. Round the number to two digits, drop the decimal point, add a percentage symbol at the end, and have a debt-to-income ratio number.

Here’s an Example: 

Income: $8500/mo (that’s the total from your income line)

Debt: $3100 (that’s the total from your expense line)

Divide 3100 by 8500. The result is .36, so drop the decimal, add a percentage sign, and your debt-to-income ratio is 36%. That’s not a significant number, but it’s not horrible. It’s at the low end of the “You should pay down some debts” area. I mean, you must get above 50% to be in the red, really. While banks may still loan you money at 36% DIY, don’t be surprised by raised eyebrows. 

Anyway, that’s how you calculate whether you have a problem. 

What is a Credit Line?

A credit line, on the other hand, is the amount of money a bank is willing to lend a customer. This, too, could be a barometer of whether a consumer has debt problems. If your credit line is high, this could indicate that you don’t have an issue. Your debt picture looks okay.

People rightly associate their credit line with responsible behavior, so you, the customer, are of interest to your lenders. The truth is that a high credit line number is an invitation to take on long-term debt. A lender has determined that you work hard and pay your bills on time, so if you’re stuck with a long-term debt, you’ll pay it off eventually.

Remember to distinguish a high credit line as something you may want to ignore. How often is it attached to a high-interest device like a credit card? Credit cards are considered a nasty form of credit because of the high fees and interest rates you pay when you carry a balance from month to month.

The Three Tactics to Tackle Debt

Anyway, without further ado, here are the three great ways to tackle the problem:

• Loan consolidation
• Pay off the debt
• Bankruptcy

One way to tackle debt is to consolidate it into one loan. It would help if you found a lender willing to do that, so your good credit and income level will work for you here. A lender may not want to loan you money if you don’t have great credit or a good income. Be careful of lenders willing to do this. Check their interest rate and loan terms before signing on.

Paying off the debt is another solution that doesn’t involve approaching anybody. Financial guru Dave Ramsey popularised the snowball method. In the snowball method, you pay the smallest loan first, pay the minimums on the rest, and finish each debt off in order of size.

Other advisors have advocated for “the avalanche method,” which involves looking at the highest interest rate as the determiner of which debt to pay off first. The avalanche method, they say, costs less in the long run. Be sure to pay the minimums on all your cards while you’re paying off first.

Avalanche Method vs. Snowball

With the Avalanche Met6hod, You pay off the more expensive cards first, which sounds less costly. The snowball method is a motivational tool that revolves around the psychology of accomplishing a small feat before moving on to a more considerable feat. In other words, start out doing it in baby steps. Regardless of the method, it’s going to take discipline.

You could call up all your creditors, one at a time, and see if they will give you a reduced loan payment, or they may offer a smaller one-time-payment option if you’re seriously delinquent. When you get to this point, experts advise you to cut up your credit cards or, in some way, avoid taking on debt. It would help if you disciplined your spending.

Finally, if the amount of debt you owe is so large, and if your income is meager, too meager to find any other solution, you could go into bankruptcy. did I say this is a great option? It’s not! This requires a session with a financial advisor who would be the person to turn to to recommend such a drastic measure. It’s a much more serious step, requiring only the best advice for your situation.

My regular email newsletter is a great way to build relationships with my readers and share the blog posts and other content I’ve worked on. If you are interested, sign up below: