Need To Know About DTR To Design An Effective Finance And Debt Management Plan

You will need to have a very distinct, strategic and proven plan to manage your finance and credit. This will ensure that your debts, which you are bound to incur, will never go beyond control.

However, when it comes to making a credit and debt plan you will be confronted with several common questions that may come to your mind in not a specific order. These questions when answered properly will help you in your planning process. A few of these important questions are:

How many credit cards should you have?
What is the ideal credit score?
How do you improve your credit score if it is less than the ideal figure?
Should you and how should you consolidate your existing debts?
Whether or not debt settlement or filing for bankruptcy will be a better idea and what are its consequences?
How much debt is too much debt?
When can a debt be bad?
Should you borrow against your home equity to pay off your credit card bills?
How a missed payment or a default can affect your credit score?
Where can you get help to manage your debt?

Most of the debtors find these questions difficult to answer and as a result are found to spend sleepless nights. Well, here are a few useful answers to these questions and once again are not in a perfect order but all are equally helpful and effective in designing a perfect credit and debt management plan that will help you to navigate easily through some of the most common credit and debt issues. The major answers are:

Borrow and use credit wisely
Work with your creditors
Get help with your credit card issues and
Improve credit scores.

These answers will help you to be confident in making the best plan to use your credit and debt wisely and to its maximum benefits. The plan will make you feel more secure and also make you feel less stressed out when you have to make any spending decision quickly.

Good and bad credit

It is not a bad thing to use your credit but it is when you use it unwisely. If you are wise you can say you have good credit otherwise you will experience the ill effects of bad credit. It is all in the way you use your credit. If you use it wisely you will enjoy the significant benefits of using credit that include:

The convenience and safety factor when compared with carrying cash
The convenience of spreading out your payments
The help provided during emergency situations and most importantly
The help you get in building a strong credit history.

On the other hand, if you do know when and why you should use your credit, it will show its drawbacks. You will have to understand the consequences of the “buy now and pay later” concept of credit and think about it at length. This will prevent you from paying more than you actually spend intended in forms of interest and fees. Such a situation may arise when:

You use credit impulsively to buy things that you cannot afford or really need
You take advantage of the tempting special offers without planning the way to pay the debt off before that special offer expires and
You do not know or care for the terms of the lending in the agreement.

Therefore, follow the advice of the experts and use caution especially when you are considering of the costliest types of borrowing:

Payday loans
Cash advances.
Car Fiance Loans

Payday loans are those that bridge the temporary gap between your present financial needs and your next paycheck while cash advances will allow you to borrow cash against your credit card up to a specific limit.

Consider the DTR

You must have a proper knowledge and know how to calculate your debt-to-income ratio so that you can make a proper budget of your income and expenses and eventually design the best plan to manage your credit and debt.

You will come across several financial advisors who will suggest that your total consumer debt load that does not include your housing debt must be ideally less than 20% of your annual net or after tax income.

However, there is a catch here. This debt-to-income ratio will consider only your consumer debts and will not include money spent on rent, a mortgage, utilities or taxes in it. Apart from that, even your consumer debts will be considered excluding car loans, credit card payments, student loans and any other debts that you pay every month.

Therefore, you should not forget to include in your debt-to-income ratio calculations those specific debts that you may have taken from your friends and family members and paying them off every month. This reason to include these debts in your DTR calculation even if these do not show up on your credit report is that there are still a major part of your monthly debt liabilities.

These will be surely taken into considerations while determining the debt settlement ratings or calculating your eligibility for a debt consolidation loan.

The guidelines to follow

When you take out a loan or make a purchase suing your credit card which is also a loan, you are ideally borrowing from two specific people:

The lender as the direct source of money and
Your future self as the indirect effect of reduced savings.

It is for this reason you should consider your DTR to make the best of every dollar that you borrow today so that it does not have a bad effect on your future financial health. A proper knowledge of your DTR will help you to know how much debt you can afford to take and manage to carry on repaying it every month till the end of its term.

This is a crucial aspect to consider so that you can avoid the usual issues associated with debt and credit management and prevent it from affecting your cash flow in a negative manner both now as well as in the long term.

Thank you,

Glenda, Charlie and David Cates