Debt to Income Ration as Important as Credit Score

By now you know your three-digit credit score is a very important number in your financial life, but did you know there's also a two-digit number that can be just as significant?
It's your debt-to-income ratio, and it can shed a light on, and help you better understand, your true financial picture.
The good news is, getting this number doesn't cost you a penny, and it can be calculated in just a few minutes at your kitchen table.
So, if you think getting insight into your financial life requires sifting through your retirement investments, reading through every fund prospectus and tallying your expenses to the penny, think again.
It's true that nitty-gritty details can make a difference, but you can get a fairly accurate understanding of your financial picture by spending just a minute or two calculating your debt-to-income ratio. By knowing the ratio -- and how to improve it -- you can increase your chances of getting a better mortgage, a better car loan and even better credit card rates.
DTI explainedYour debt-to-income ratio is exactly what it sounds like: the amount of debt you have in the form of mortgages, car loans, student loans and credit card debt, as compared to your overall income.
To calculate your overall debt-to-income ratio, sometimes known as a back-end ratio, add up all of your monthly debt obligations -- often called recurring debt -- including your mortgage (principal, interest, taxes, and insurance) and home equity loan payments, car loans, student loans, your minimum monthly payments on any credit card debt, and any other loans that you might have. Do not include expenses such as groceries, utilities and gas. Take this total and divide it by your gross monthly income from all sources. If you're not good at long division or don't have a calculator handy, go to Bankrate's calculator section to use our debt-to-income ratio calculator.
Note: Some lenders will exclude the mortgage payment from this equation, but they lower the ratio. The concept is the same: it measures your debt load in comparison to your income.
Let's say you and your spouse together earn $83,000 per year or $6,916 per month. Your total mortgage payment is $1,350, your car loans total $365, your minimum credit card payments are $250 and your student loans add up to $300. That equals a recurring debt of $2,265 a month. Divide the $2,265 by $6,916 and you'll find your DTI is 32.75 percent.
In general, you'll want to keep that number below 36 percent -- a threshold that loan officers and credit card issuers often use as a factor when they determine how much they're willing to lend you. "If you go higher than 36 percent, you are on a slippery slope," says Diane McCurdy, a Certified Financial Planner and author of "How Much Is Enough?" Lenders might give you money, she adds, "but they'll give you higher interest rates, and if anything goes awry, they'll sock it to you."
So why is that number so important? It's all about proportion, says Laura Russell, a certified financial counselor with GreenPath Debt Solutions. "You can be making a lot of money every month, but if you've got the debt to match it, that can be a problem," she says. "It's important not to overextend yourself." The higher your number, the riskier it is for lenders to offer you loans -- and the more they'll make you pay for them.
Finding leverageWhile debt-to-income ratios don't have the kind of buzz that credit scores do, they can play a key role in determining if you qualify for a loan and how much you can get. "Your debt-to-income ratio is one of the tools that banks will use to determine whether they'll lend you money for a mortgage, a car loan or a student loan," says Dave Hinnenkamp, CEO of KDV Wealth Management.

Pay Off Debt Quickly

Tax refunds from True Credit by Transunion
Waving a tax refund check at someone who has substantial credit card debt is like taking a Biggest Loser contestant to an all-you-can-eat buffet. It might seem like a form of torture, but all we can say is, resist spending that refund money and apply it toward your outstanding credit debt. Here’s why: you’ll get an immediate return of 18% or more, depending on what the interest rate is on your credit card. If you spend the money on a mortgage payment or home improvement instead and leave the credit debt to grow, you’ll be dogged by ever-increasing interest charges. Like the Biggest Loser contestant skipping the buffet, we recommend not even imagining what you could spend the refund check on.
Paying off debt is more critical this year
Sound like familiar tax season advice? Yes, but the 2009 tax season is different. Banks are tightening credit. Real estate values and mortgage rates might be dropping in some places, but that doesn’t mean credit is any easier to get. So besides paying off credit card balances to prevent having to pay interest charges, you just might be helping your credit score.. Remember, part of what credit bureaus use to determine your score is your debt-to-income ratio. The less available income you have going toward debt, the better for your credit score.
Let’s face it: paying down credit card debt isn’t fun. It’s much more immediately gratifying to spend the money, particularly on something you’ve wanted for a long time (for some of us, that might be a shopping spree in New York, for others it’s the ultimate man cave). Plus, it’s easier to justify spending that money if it’s a necessity rather than a “fun” purchase: a new stove, a new fan belt, new clothes for the kids.
The (almost) painless way to reduce debt
Now, we’re not telling you to let your kids go barefoot or drive in something that puts your life at risk. However, the sooner you pay off credit debt, the more flexibility you have to spend the money on other things. A refund check from Uncle Sam is an almost painless way of making a substantial inroad. (Yes, we feel the pain of not being able to spend the money, too.) Let’s say your outstanding credit balance is $13,000 and your refund is $800. How many months of paychecks would it take you to apply that much to your credit card balance? Isn’t it easier now to just wipe off a substantial percentage in one fell swoop? Won’t that make you feel better—at least as good as using it to take a vacation in Hawaii?
If images of Oahu are still hula dancing in your brain, do the numbers. Take a hard, cold look at what you still owe now and how much less you’ll have to pay back (and worry about interest on) once you apply that refund check to it. Feel better now?
Next Year: No Refund?A parting word: as much as you might look forward to your refund, for next year, consider adjusting your withholding to get a smaller refund (or none). Then you’ll have

Why would a creditor settle for less??

Q. Why Would a Creditor Agree To Accept Less?

A: The primary reason a creditor will accept a settlement is because it is cost effective for the creditor, plain and simple. The degree of the discount (how much they will forgive) will vary case-by-case; therefore, a creditor will take into account many factors when determining their bottom line on accepting a settlement.

The primary factor creditors take into account is what percentage of the debt is likely to be collected in the future if they do not accept an offer now. The other factor creditors look at is what is the likelihood of collecting the full debt through normal collection activity or through the legal system.

Before they agree to any settlement, they will often take into account, debtor's income, the state they live in, the age of the debt, type of debt, debtor's assets, etc.

Professional negotiators will put a case together that will make the creditors understand that it is in their best interest to settle the debt and accept their offer.

Bankruptcy Vs Debt Settlement

Q. Is Debt Settlement like Bankruptcy?

A: There is a major difference between Debt Settlement and Bankruptcy in many areas. Chapter 7 Bankruptcy remains on your credit report for a minimum of 10 years, whereas your charged-off accounts (the derogatory accounts) may remain on your credit file for only 7 years. Sometimes, these may be removed by a competent credit repair firm earlier. But be advised that most credit repair companies will just take your money and not deliver the promised results.

Never enter a Debt Settlement program, under the assumption that you will get the negative accounts removed in less than 7 years. To be safe, base your decision on the 7 year rule, then, if you are successful in removing negative accounts earlier, it will just be frosting on the cake.

Bankruptcy reporting on your credit file may also affect other areas of your life. Bankruptcy is a PUBLIC RECORD. Most counties report recent bankruptcies in the newspaper every month or every quarter. The is also a publication that most lenders subscribe to the provide them all the recent filings. Bankruptcies filings can be found at the county registry as it is considered public information.

So its important to understand that a bankruptcy is not easy to hide from and is considered public information.Most employers pull credit files on potential candidates. It is likely that the candidate without bankruptcy will have a better chance at the position. Additionally, some employers will not hire an individual with a bankruptcy on their credit file, period. Lastly, some positions will absolutely exclude a candidate with a bankruptcy. This is especially true for security jobs, high level management jobs, jobs at banks and financial institution and many other types of positions.

Bankruptcy can also cause issues with renting. Many landlords will not rent to individuals with a bankruptcy file. While, landlords cannot discriminate, they may legally not rent to someone based on their credit profile.

Bankruptcy can also exclude you from loans in the future. While its true that some creditors will grant credit after a person files bankruptcy, (although there is typically a waiting period) some creditors will not grant a loan to anyone with a bankruptcy on their credit file. Most loan applications ask if you have filed bankruptcy in the past 10 years, and some actually ask if you have ever filed for bankruptcy. Although the question – have you ever filed for bankruptcy may not be a lawful question, nonetheless, if you do not answer it, it will raise a red flag and if you answer “no” you will not be truthful.

No matter how you cut it, bankruptcy can affect many areas of your life and should be avoided at all cost. It should be your last resort. You should not file bankruptcy until all your options have been exhausted or at the very least explored, unless you have come to the decision that you have no other viable options.

Brief History of U.S Consumer Debt

Here at Achieve we strive to give you ideas on how to change spending habits and learn to live without credit, and therefore without debt. There are not many people who can remember a time where borrowing money to buy what you want was not a normal part of life. But it was, at one time, how everybody operated. Consider the following brief history.

In 1856 former U.S Senator Thomas Morris observed in his assessment of America’s credit system, “in my opinion, we have too much, instead of too little credit; too many of our citizens are endeavoring to live on credit , instead of industry.” Senator Morris’ comments came just as consumer credit was taking root in American Society. Only a short time after in the 1920’s did we experience a huge falling out economically, much like today, because of the principles and risk of living more and more on credit rather than actual dollars.

It was not until the turn of the twentieth century that consumer credit began to be accepted more widely in American Society. In 1899, economist researching household money management discovered that trends in personal credit were undergoing significant changes. Installment debt was suddenly widespread among many Americans and was representative of all levels of the social economic ladder.

This movement toward an increasing use of credit for personal consumption grew through the era leading up to the Great Depression. “By 1926 two of every three cars sold were bought on credit. Over the same period, outstanding consumer debt nearly doubled (in constant dollars), while household debt as a percentage of income rose from 4.68% to 7.25%” Quoted out of the book Buy Now Pay Later: Advertising, Credit and Consumer Durables in the 1920s.

Much like the prediction prior to the turn of the century, when credit was mostly limited to individuals borrowing against their existing assets to pay for the next planting season or for proprietors to provide locals the ability to buy goods from them and pay later, consumer credit took a giant leap forward in the late 80’s and early 90’s. In fact starting in 1991 until the first quarter of 2001 when expansion finally came to an end, total household debt, consumer credit debt, and mortgage debt all doubled. This along with other factors stemming from economic recession, led to the current situation America finds itself in today.

What does all of this mean? Well at Achieve Security, with your program structure you are already changing your habits. I am sure everyone has had to make some lifestyle adjustments, and now you are conditioning your self to placing money in an account for savings to pay off your debt. You will finish this program and find that if you continue to save money each month and exercise some discipline, in a very short time you can pay cash for a big purchase, rather than buy on credit. The more you learn to practice this habit, the more dollars you will save in not paying interest on revolving credit balances.

Holiday Spending Habits

The holiday season is just around the corner and you may be thinking about all the holiday costs. We agree that Christmas should be a wonderful time of year and can be if you keep spending under control.

Many people sacrifice quite a bit to supply Christmas gifts for loved ones. A recent article on British news site “24/7” stated that the average Britain spends $351 dollars per family for holiday gifts. In contrast, American families spend an average $859 per holiday according to the American Research Group.

Are Americans too caught up in “keeping up with the Joneses”? It is a good question, especially when considering the credit card debt that builds after each Christmas season.

While many may make a point of saving for a car or for their child's education, few people plan ahead for their annual holiday spending. If you are paying down debt, it may be time to cut back on the Christmas spending. You don’t have to skip the holiday, just be more like the British and spend less. Or you could decide to make a gift or give a gift of your time to a family member rather than spending cash.

But we understand that holiday cash requirements can arise and times get a little tougher around the holidays. Therefore, Achieve Security has programs designed to help get you through the seasonal crunch.

Too often, we see clients drop out of their debt program entirely without discussing their options. We would be happy to discuss reducing your payments during November and December. But remember, any decrease in payments will increase the time necessary to free you from debt. Still, it is better to stay with your program through the holidays so that next year can truly be a happier New Year!

Please call our client services department at any time for more details.

Consumers Say Recession is Here, Focus Shifts to Debt

According to credit and collection news “A recession has occurred whenever the Sentiment Index has declined as much as it has fallen during the past year, including the recessions occurring from the mid-1950s to the early 2000s,” remarked Richard Curtin, director of the survey, which found that consumers were nearly unanimous in the opinion that the economy had already slipped into recession.

Consumers have adopted much more cautious spending plans, and are shifting more toward repaying debts and rebuilding their savings. The expectations index fell over 31% in March of 2008. This same index fell by 24% prior to the 1990 recession.

The majority if consumers receiving the tax stimulus package show indications that they plan to pay off debt and rebuild savings.

“Consumers are now more in favor of repaying credit cards and rebuilding their reserve funds so they have the needed financial flexibility to handle any future twists and turns in the economy,” Curtin said Friday.

As we pointed out last month Achieve Financial Security encourages this plan and suggests that in the long run you are much better off putting your money towards paying off your debt NOW rather than spending it on something else that could wait.

Especially with declining home values hitting a 20 year high. Over 35% of homeowners surveyed reported declines in home value as compared to 18% one year ago and only an only 3% 2 years ago.