Reducing debt usually isn’t a high priority for people until they have already gotten into trouble with overspending. Using a few basic guidelines, and debt calculations, can help you see when your debt load is getting into the danger zone.

Budgeting Guidelines

Creditors use budgeting guidelines when reviewing and approving credit. If your debt exceeds the financial communities recommended guidelines, then you have a higher risk of credit applications being denied.

Getting, and keeping, your debt in line with recommended budgeting guidelines, is an important step in debt reduction.

Use the following recommended budgeting guidelines (the same ones used by Financial Institutions) to review the items in your budget:

1. Housing 35% - Mortgage or rent, taxes, repairs, improvements, insurance, and utilities;

2. Transportation 20% - Monthly payments, gas, oil, repairs, insurance, parking & public transportation;

3. Debt 15%* - Credit cards, personal loans, student loans & other debt payments;

4. All other expenses 20% - Food, insurance, prescriptions, doctor & dentist bills, clothing & personal;

5. Investments & Savings 10% - Stocks, bonds, cash reserves, retirement, rental real estate, art, etc.

Debt Income Ratios

The second step is calculating your debt income ratio. Once you know what your ratio is, you will understand just how important debt load is to your overall financial picture. Your debt income ratio is the percent of your monthly take-home pay that goes to paying debts.

You calculate it by taking the amount needed to repay debts each month, including rent or mortgage, and divide by your take-home pay (your net pay after taxes). Remember, this is “Debt” ratio, so only include actual debt repayment in the calculation.

Credit To Debt Ratio

Just because you pay off a credit card is no reason to close your account. One little known fact about the Credit to Debt Ratio is the reverse effect it has on your credit score. If you pay off a credit card, and close the account, you are actually negatively impacting your credit score.

The reason for this negative effect is in the calculation of the Credit to Debt Ratio itself. This ratio is the relationship of your debt total vs. your credit limit.

You calculate it by dividing the total credit limit of all credit cards and loan accounts by the total of the actual debt (spent total). Now, if you pay off a credit card, you are reducing the actual debt, which is great, but, if you close the account, you are also dramatically reducing the credit limit you have, and usually by a higher percentage than the debt reduction.

Pay Yourself First

Essential to long-term financial success, and protecting your future, is paying yourself first. While this may seem easy to do, it happens to be the last thing most people do, instead of first. Debts and other financial obligations, money for entertainment, and other spending always seem to take a higher priority. All I can say is, STOP! Think about it, if you aren’t worth being paid first, then who is? Always put something away in your savings, and leave it alone. It doesn’t matter if it’s only $5 a week, just do it!

Snowball The Credit Cards

Last, but not least, is making extra payments, not just the minimum payments, on your credit cards. You have probably already seen this many times, but it just can’t be stressed enough. Paying just $10 extra a month on a credit card, above the minimum required payment, can cut your repayment term in half, if not more! So, squeeze out that extra payment, however small, every month, and take advantage of the compounding effect of snowballing your debt away.

The Power of Financial Knowledge

Remember, you don’t have to be a financial whiz to understand what’s going on with your credit and debt. Just a few simple calculations, and an eye on the future, will go a long way to help you succeed financially and keep your debt under control. Be safe, be smart, do the math!

Related articles:

Compare the pros and cons of debt consolidation loans, service companies, and credit counseling.

http://www.debtsteps.com/consolidate-debts.html

Understanding how your credit score can affect your debt relief choice

http://www.debtsteps.com/credit-score.html

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About The Author

Debs is the editor of www.DebtSteps.com where you can get the answers you need about debt relief, consolidation, credit counseling and more. Free subscrption and money management worksheets http://www.debtsteps.com/debt-help.html

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If you’re a homeowner in need of money, you probably have some loans that are easily available to you. As long as you have some equity in your house–the amount of your home’s value minus any amount you still owe on it–you can tap it for cash. In general, these three loans are easily available to most homeowners:

HOME EQUITY LOAN:

Based on the amount of equity in your home, you can borrow on that amount and receive it in one lump sum. Your lender will assess the amount you can borrow, and you’ll simply need to fill out some paperwork before receiving your check. Although your credit history and credit score will probably be checked during the application process, even those with less-than-perfect credit can usually get approval as long as you have sufficient equity in your home. A Home Equity Loan is perfect for folks who need a chunk of money for remodeling or an emergency.

HOME EQUITY LINE OF CREDIT:

Similar to a Home Equity Loan, the amount you can borrow is based on the equity in your house. However, rather than receiving a lump sum of cash, you’ll be issued a line of credit. This is a revolving account–meaning you can draw off it over and over again. This type of loan is best for folks who plan to use it as an emergency fund, or who are going to make many small repairs to their home over time.

SECOND MORTGAGE:

In this case, you simply take out a second mortgage loan on your home. By placing a second loan against your home, you get a lump sum of cash to use for whatever reason you desire. However, second mortgages tend to be expensive. You’ll have to pay closing costs, fees and possibly points on your loan. The interest rate tends to be higher, since a second mortgage is a bigger risk for a lender (in the event of default, your first mortgage is the one that gets paid off).

Most homeowners will find that they qualify for at least one of these three types of loans. Choosing the best one for you depends on your personal circumstances, such as the amount of equity in your home and the reason you want the cash.

Go to http://www.homeequitywise.com to compare Home Equity Loans vs. Second Mortgages.

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If you are like most Americans you’ve probably racked up considerable debt trying to keep up with the Smith and Jones families down the street. According to Cardweb.com, the leading online publisher of information pertaining to credit and other payment cards, you are not alone. In 2004, individuals who earned between $75,000 and $100,000 per year, and had at least one credit card, carried an average revolving balance of nearly $8,000. This does not even include other personal debts such as car loans, which can total in the tens of thousands.

If credit card debt is keeping you up at night, you’re probably wondering what you can or should do about it. File for bankruptcy? Refinance? If you refinance, is a fixed mortgage rate or an adjustable rate mortgage better? What about a home equity loan? The simplest answer of course is to get a debt consolidation loan.

What is a Debt Consolidation Loan?

Simply put, a debt consolidation loan lumps all of your debts together and pays them off using a single new loan. The next question of course is how to go about getting a debt consolidation loan. Visit a loan shark? Take out a second mortgage on your home? Apply for an unsecured loan at the bank and hope for the best? For the majority of folks a visit to the local loan shark is not a viable option; but taking out a 2nd mortgage or obtaining an unsecured loan from the bank are both excellent choices.

Whether you use a second mortgage or an unsecured loan to pay off credit card debt, often depends on several important factors including whether you actually own a home, what your credit rating is, and what the total dollar amount of the credit card debt is that you owe to various financial institutions. According to one expert we spoke to who used to work in the unsecured loan business but now runs his own mortgage broker business, “The most important consideration is the borrowers credit history.”

2nd Mortgage

A second mortgage is a loan or mortgage that is taken out after a first mortgage. It is similar to a first mortgage in that it uses the equity built up in a home as collateral. Similar to a first mortgage, a second mortgage consists of a fixed dollar amount that is paid out in one lump sum and repaid over a period of time typically 15 or 30 years. A 2nd mortgage may be either a fixed rate or an adjustable rate mortgage.

Sometimes called a junior mortgage or junior lien, a 2nd mortgage is subordinate to a 1st or primary mortgage. What this means is that in the case of default, the lender for the first mortgage gets paid before the lender who issued the second mortgage does. As such, a 2nd mortgage is considered to be a higher risk and lenders often charge a higher interest rate; however, this rate is generally lower than an unsecured loan or the interest charged on most credit cards.

Second mortgages are tax deductible, a major advantage for most people. The payback period is over a fairly long period of time so monthly payments are lower and the total loan amount is generally larger. “There are some cons to consider when thinking about taking out a second mortgage,” explains Brett Bostwick, owner of Snowbird Mortgage Company. “It takes longer to get approved, there is more paperwork involved, and because it is a mortgage loan, there are closing costs such as appraisals and title searches,” he says.

Unsecured Loan

An unsecured loan is a lump sum payout that is repaid at a fixed rate of interest in equal payments over a short period of time, typically 5 years or less. Unlike a second mortgage, collateral is not necessary to secure the loan. Loan amounts are relatively small, usually less than $15,000.

Interest rates on unsecured loans, which are sometimes called signature or personal loans, are determined by whether you are considered a good credit risk. In other words, the higher the credit score, the lower the interest rate will be and vice versa. A bad credit score will earn you a higher interest rate, sometimes the same or higher than the credit card interest you are paying. This is compounded by the fact that an unsecured loan is considered a higher risk (no collateral), and lenders may charge interest rates that are often quite high, generally higher than the interest rate on a second mortgage would be, but usually less than that 18%-plus interest credit card debt you are trying to pay off.

Unsecured loans have a couple of advantages over second mortgages in that approval process is much quicker and there are no additional costs involved. Because the loan period is shorter and the interest rates are higher, monthly payments are also higher. Nor is the interest is not tax deductible. However, if you default on the loan, it may damage your credit but you won’t lose your home.

The Bottom Line

It really depends on your situation. What is best for a co-worker or neighbor might not be the best choice for you. Most experts advise getting a 2nd mortgage if you are paying off a larger amount of bills and you don’t mind paying closing costs or the longer approval process required for a second mortgage. If you need money quickly and only have a small amount of debt to consolidate, it’s probably better to go for the unsecured loan.

Of course unless you exercise restraint, change your spending habits, and stop using those credit cards, you will fall right back into credit card debt. With a little hard work and perseverance however, you will remain credit card debt freeand able to keep more of those hard-earned dollars in your pocket instead of handing them over to the bank.

Heleigh Bostwick is a respected publisher from Simple Living with a “Green” Twist. This author is a well known free-lance writer who focuses on home equity financing. You can read more refinance related loan articles at the Home Equity Loans Center. To get a free Second Mortgage Quote and get more information about refinancing and second mortgages, please visit the Second Mortgages Online.

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