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Manage Debt
How to Tell if You're in Trouble |
Let's take a look at some of the warning signs of
overindebtedness. The worst thing you can do at this point is ignore them like the credit
card bills piled high on your kitchen counter. The table that follows will help you assess
whether you've assumed too much debt.
See if these tell-tale signs apply to your financial life:
| Warning
Signs |
Yes |
No
|
| You pay only the minimum amount on
credit cards and loans |
|
|
| You are tapping
your savings to pay for current bills |
|
|
| You have reached the limit on your
credit cards |
|
|
| You often pay many
of your bills late |
|
|
| You are receiving calls and letters
from creditors about overdue bills |
|
|
| You are borrowing
from one credit card to pay for another |
|
|
| You are unsure about how much you owe |
|
|
| You skip payments
on some bills in order to pay others |
|
|
| You have insufficient cash saved for
an emergency |
|
|
| You use credit
cards to pay for essentials like food or rent |
|
|
If more than two of these
warning signs hits home with your current financial situation, you may want to take a
closer look at your debts. You might have too much.
So How much is too much?
First, you need to determine the number of debt payments you're currently making. Pull out a pencil and some paper, draw three columns and
label them as follows:
Creditor* |
Payment |
Interest |
| 1. |
|
|
| 2. |
|
|
| 3. |
|
|
| 4. |
Total_______ |
Total_______ |
| *Don't include mortgage or rent. |
Total the last two columns. The
third column's dollar amount might be a wake-up call as to how much you're really paying
in interest charges to creditors each month.
Take the total from column two and we'll use it to determine if your debt level is too
high. Plug it into the following equation to find the proper debt-to-income ratio:
Total
Payments
----------------- = Debt-Income Ratio
After-Tax Income
For example, if your monthly payments total $275 and your take home pay is $1900, your
debt-to-income ratio would be 14%, healthy by any standards. Generally, you want to
maintain a low debt-to-income ratio.
Less than 15%
Your debt situation is fine and you're managing money well.
Between 15% and 20%
Your headed for trouble. Consider seeking help and take steps to prevent debts from
accumulating.
Between 25% and 35%
Your in trouble. Seek help.
Over 35%
You may be headed for bankruptcy.
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