Freedom Blog: Personal Finance News & Advice

Have you ever avoided your mailbox because you don’t want to deal with your credit card bills? Do you feel anxious when someone brings up the topic of money around you? Does the thought of balancing your checkbook make your stomach turn? If so, you may suffer from a mild version of financial phobia.

Financial phobia is the fear of dealing with personal financial issues like budgeting, investing, paying bills, or even checking your bank account. It can come in many different forms—from refusing to open your bills to panicking or feeling paralyzed every time you think about your financial situation.

If you’ve ever experienced symptoms of financial phobia, you aren’t alone. A study from Cambridge University in the U.K. found that 45% of people who suffer from financial phobia feel their heart race when dealing with personal finances. Another 12% feel sick, and an alarming 15% become immobilized when they have to work on their finances.

The same Cambridge University study found that 20% of people living in the U.K. may experience some form of financial phobia. Although a study like this hasn’t been performed in the U.S., chances are that the results could be similar.

In 2016, the typical U.S. household that carried a credit card balance owed an average of $15,654 in credit card debt—an amount that has steadily increased in the past 20 years. If you’re one of the hundreds of thousands of Americans who owe $15,000 or more in credit card debt, it’s very likely that you feel overwhelmed about your financial situation. You might even try to avoid financial matters at all costs because it’s just too much to think about.

If you feel so defeated by your financial situation that you’re beginning to experience financial phobia, there are steps you could take to overcome your fear and start making your financial situation better. But first, it’s important to understand the causes and risks of financial phobia so that you can make a plan to conquer your financial phobia and improve your finances.

What Causes Financial Phobia?

Some people experience financial phobia because they associate money with negative experiences like being in debt, losing a job, or having a serious financial emergency. Other people may have financial phobia because of past arguments they’ve had with loved ones over money, or because they never learned about personal finance and don’t know how to deal with it.

Phobias aren’t always rational, but many people with financial phobias feel they have lost control over their finances and don’t know how to regain it. However, avoiding your finances because of your financial phobia could lead to more problems in the future.

What Are the Risks of Financial Phobia?

If you’re suffering from financial phobia, your finances could be at serious risk for the following reasons:

• You may run the risk of overdrawing your accounts if you don’t check your bank statements.
• You could miss payments if you don’t check your bills regularly.
• By avoiding your credit report and FICO score, you may not know that you are the victim of identity theft.
• Banking errors, overdrafts, and missed payments could lead to fees, higher interest rates, and fraudulent charges.
• Saving, investing, and managing your money is very difficult if you don’t monitor your accounts.

The bottom line is that ignoring your finances could end up being much scarier than confronting your financial issues head on. While it may be hard to face your financial fears, it is possible to overcome your phobia and deal with your finances better if you have the right resources.

How to Deal with Financial Phobia

The first step in dealing with financial phobia is admitting that you have a problem. Acknowledging your financial phobia could help you set up a plan to overcome your fears. Here are a few techniques that could help you get rid of your financial phobia for good:

• Take It Slow
  One of the best ways to deal with financial phobia is to address the issue in small doses. At first, it may be hard to confront your fears. But every small step you take, like using an app to monitor your monthly spending, could help you rebuild a healthy relationship with your finances again.
• Talk to Someone You Trust
  It’s important to have a support system whenever you deal with your fears, and financial phobia is no different. Having a friend or family member to call when you’re struggling with your phobia could help give you the courage to address your issues head on instead of avoiding the problem.
• Assess Your Phobia
  Knowing why you’re struggling with financial phobia could be the key to overcoming it. For example, opening your credit card bills may trigger your phobia because you’re worried that your debt is too high and you’re not sure how to deal with it. If that’s the case, the best way to overcome your financial phobia might be to make a plan to get out of debt.
• Get Professional Help
  You don’t have to deal with financial phobia on your own. After identifying the reasons why you’re experiencing financial phobia, it may be easier to get help. Depending on the cause of your financial phobia, resources like adult education courses in personal finances could help.

If you’re experiencing financial phobia because you’re struggling with heavy debt, download our free debt guide to review your debt relief options and find the right solution for you.

Our Certified Debt Consultants talk to people every day who are anxious and worried about how to deal with $10,000 or more in debt. Their job is to help these people, and they could help you too. Over the phone, they will be happy to walk you through several debt options (not just the FDR program) and help you find a solution that might work best for you. Request a free debt evaluation now.

By adjusting your attitude about your finances, creating a support system, and getting help dealing with your fears, you could put your financial phobia in the past!

Being in debt can feel like an endless struggle—especially if you’re dealing with multiple kinds of debt, like mortgages, student loans, auto loans, and credit card debt. Making payments on all these different types of debt can be tough, and getting ahead might seem impossible. To make things worse, you might not even know which debts to start paying off first (if you have extra money to make more than minimum payments).

It’s an unfortunate fact that debt is a way of life in the U.S, with $137,063 average household debt in 2016. Almost every major purchase, financial milestone, or life event has a debt amount tacked onto it. And if you aren’t part of the 1%, you might spend years working to overcome your debt.

If you’re one of the millions of Americans in debt, you might be surprised to learn that not all debt is bad debt. In fact, some debts are useful if you want to make more money, buy a home, or improve your finances. Being able to identify the differences between good debt and bad debt could help you figure out which of your debts you need to worry about first, and what can wait for later.

Good Debt

Any debt that helps you build wealth or create a better financial future is good debt. Good debt helps you find a higher-paying job, own rather than rent, and make more money for yourself. A few kinds of good debt include:

1. Mortgages
   
   Even though it may take 15-30 years to pay off, a mortgage could be a good type of debt. Going from being a renter to a homeowner may be smart because the money you put towards your mortgage could go back into your pocket if you decide to sell your home. And if you pay off your mortgage and decide not to sell your home, you can put that money into savings or invest it for an even higher return.
2. Student Loans
   
   Spending money on your education could help you make more money in the future. Even if it means going into debt, student loans often pay for themselves in the long run because of the new career opportunities they could enable. In fact, college degree holders could make up to 84% more money over their lifetime than people who only receive a high school diploma.
3. Small Business Loans
   
   Putting money behind your small business idea could be a solid decision because the goal of any small business is to make more money. If you’re a hard worker and have a solid business plan, your small business loan could give you the capital you need to set yourself up for growth and ultimate financial success.

Other types of good debt include certain auto loans, rental property, and investments that should increase in value over time. But good debt isn’t always good for you, especially if you don’t have the cash to pay it off. Even if you take out a good debt, you need to make sure that you’re getting the most value possible.

For example, an auto loan could be a good debt if you need a car to get to work. But the type of car you get matters. Instead of diving into heavy debt for a sports car or high end model with all the bells and whistles, the smarter financial decision is to buy a car in your price range—even if that means it’s used.

When it comes to taking out a mortgage, small business loan, or student loan, it’s smart to be frugal. Remember: a good debt is only good if it fits your budget. Always think about what you can afford to spend each month on debt before you take out a new loan—otherwise you may end up having to take out a bad debt to cover the cost of a good one.

Bad Debt

Generally, if you take out a debt on anything that will decrease in value over time, that debt is considered a bad debt. There are a few different ways to get into bad debt:

1. Credit Cards
   
   One of the most common forms of bad debt is credit card debt. In 2016, American households that carried a credit card balance had an average credit card debt amount of $16,883. Though some consumers accumulate credit card debt buying things they don’t really need, America’s dependence on debt is also linked to stagnant household income and rising costs. Unfortunately, relying on credit cards to pay for essentials can be a slippery slope.
   
   With average APRs hovering around 14% for many credit cards, credit card debt could end up costing you thousands in interest alone by them time you pay it off—making it one of the worst kinds of bad debt.
2. Personal Loans
   
   Personal loans can be used for almost anything—from paying for a vacation or wedding to consolidating your credit card debt. While personal loans usually have lower rates than most credit cards, they can be used for items that will decrease in value over time. That’s why they are considered a bad debt.
   
   One particularly dangerous way to use a personal loan is as a down payment on a home or auto loan. If you do this, you are essentially doubling the payments you need to make each month, which could land you even deeper into debt.
   
   Even if you take out a personal loan to consolidate credit card debt at a lower rate, personal loans could end up harming more than they help. Unless you have a plan to pay off your debt for good, a personal loan doesn’t do much more than shuffle your money around. And worse yet, if you don’t stop using your credit cards after consolidating your debt into a personal loan, you could end up in even more debt than you had before.
3. Payday Loans
   
   Borrowing in the short term could really hurt you over time. Payday loans usually charge you an additional dollar amount for every $100 dollars you need to borrow. Amounts range from $10-$30. But if you can’t pay within the given amount of time, you could get hit with additional fees. Since payday loans are one of the most expensive types of loans and there are harsh consequences if you can’t pay them back, they are considered bad debt.

You could get into bad debt for many different reasons. Sometimes, it’s because you are using credit for things you don’t really need. At other times, it’s because you have to use credit for a sudden expense that needs to be paid right away. But in most cases, you get into bad debt because that’s the only option.

Wages have remained stagnant over the past five years, but the cost of living has gone up. With no savings and nowhere to turn, many Americans get into bad debt because it’s the only way to get by. If you find yourself in a bad debt situation, there are a couple ways to deal with your money problems.

How to Deal with Bad Debt

The first step in dealing with bad debt is figuring out which of your debt is actually bad. After you pinpoint the credit card, personal loan, and payday loans that need to be eliminated, come up with a plan to pay if off as fast as you can.

If you have a lot of bad debt, a debt consolidation loan may not be your best option. Debt consolidation loans could end up being another form of bad debt if you maintain the spending habits that got you into debt in the first place. And since you have less time to pay off a debt consolidation loan, your payments will be a lot higher and add even more financial stress to your situation.

If you’re struggling with $15,000 or more in bad debt, like credit card debt, a better option could be debt settlement. Companies like us at Freedom Debt Relief offer an affordable program that could help you end your bad debt without the stress of high payments. With help, you could put your debt in the past a lot faster than making minimum payments, and for less than the cost of a debt consolidation loan.

To find out how Freedom Debt Relief could help you overcome bad debt without a loan, request a free debt consultation now.

If you want to get out of high-interest debt, consolidating your debt with a personal loan could be a smart choice. Debt consolidation loans could help you pay off your debt in full in one fell swoop. And since these loans simplify your payment schedule into one predictable payment each month, they could even help you manage your finances better. As a bonus, you’ll be able to make headway on the entire amount of your debt since payments will be applied to both the interest and principal each month.

Personal loans are available via banks or direct lenders. Both banks and direct lenders evaluate your creditworthiness before they lend to you, but direct lenders can use different criteria for evaluating your credit worthiness than banks do. Because of this, direct lenders may offer rates and terms that traditional banks don’t provide. 

Not all lenders are the same, and your rate might vary between each lender. While you might think that you should choose the lender who offers you the lowest rate, there are many other factors you should consider before you take out a consolidation loan. Before signing loan papers, read these tips on securing the right loan for you.

1. Find a Reputable Lender: Select a lender that you know by name or one with a good reputation. Be careful of loan aggregators or brokers as these companies are “middle men” who can share you information with anyone, including unscrupulous businesses. Remember when looking for a lender to only enter financial information on the website with a URL that starts with “https://” as the “s” stands for “secure.” In addition, many sites use a padlock symbol to denote security.
2. Review the Fees: Many loans have an origination fee. For personal loans, this fee typically ranges from 1%–5% of the total amount borrowed. The specific fee you pay will depend on market conditions, your financial situation and your history of repaying debt. As the fee will be taken from the full amount prior to you receiving the funds, be sure to account for this when you make the initial amount request. As an example, if the origination fee is $500 and you need $10,000 to consolidate medical bills and credit card debt, then you may wish to add the amount of the origination fee to the loan request. Otherwise you’ll only receive $9,500 after the origination has been deducted. Similarly, if the loan doesn’t appear to have an origination fee, confirm that it doesn’t with the lender before signing papers. And always ask if there are additional fees the lender might assess.
3. Decide about Loan Insurance: Some lending businesses may set you up with a loan and then try to sell insurance in case you miss a payment. They might offer:

   • Unemployment Insurance: Loan payments will continue to be made if you become unemployed or are out of work for other eligible reasons.
   • Life Insurance: Repayment of the loan will be taken care of in the event that you die prior to closing out the loan. Keep in mind that it is better to purchase a general life insurance policy that your family can use to cover any type of expense, not just a policy that covers a specific loan.

   Loan insurance is expensive and often contains significant loopholes that protect the insurance company and not you.

4. Research Interest Rates: Compare rates with several companies as lenders can use different calculations to determine the interest rate. Keep in mind that your credit score will heavily determine the rate you pay. Average interest rates on personal loans are 14%–18%, yet these rates can vary widely from as low as just over 4% annually for people with exceptional credit to 25% for people with poor credit. Try to work with a “live” person to request the rate so that you might qualify for without having to run a credit check; however, once you complete an application to receive a personal loan, the lender will assuredly check your credit.
5. Ensure There Is Customer Service: Some online lenders may claim to offer excellent rates and terms, but be cautious if it’s impossible to speak with a “live” and knowledgeable representative. Today’s independent lenders use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan, yet they may not have the same type of staffing as a traditional lender. Reputable lending businesses have knowledgeable advisers you can speak with directly to answer questions and identify the best solution for you. These adviser consultations can be especially helpful if your credit score does not reflect their repayment capabilities.
6. Know There Is a Credit Check: Avoid lenders who say they don’t care about your credit history. All reputable lending companies disclose that they will do a credit check as they need to know if you pay your bills in full and on time. This history is used as guidance that you’ll be able to repay what you borrow—and this credit check can have a short-term impact on your credit scores. Data from a single credit bureau may not be enough. The lender might review your credit history via Equifax, TransUnion and Experian.
7. Be Wary of Tempting Offers: After you apply for a loan, you will see several options from lenders. One alternative might be a loan with a lower payment and longer term. Be clear that this means the total cost of the loan will be higher! If you can afford to pay more each month, then take a shorter-term loan. Also, only borrow what you need and what you can repay promptly. This way you can avoid getting into further debt issues. If you are uncertain for how much to borrow, carefully read the fine print and ask a financial adviser for a second opinion.
8. Avoid Financial Scams: Ensure that the lender is registered to do business in your state. Also, there should be no need to pay up front to get a loan—avoid lenders who ask for a prepaid debit card for payment of insurance or fees as well as stating they will use the card as collateral. These are not reputable lenders! Although there may be an application fee or administrative costs, these are deducted from the loan and not something you pay beforehand.

After you receive your loan, be sure to use the funds the way you intended. If you are using a personal loan for debt consolidation, some companies will assist you with this goal by sending the funds directly to creditors.
 
Finally, if you don’t qualify for a low interest rate on a personal loan, then it might not make sense to get a debt consolidation loan. If this is the case or you feel overwhelmed with organizing debt consolidation plan, consider enrolling in a debt relief program like the one offered by Freedom Debt Relief. Such programs can help with debt negotiation and simplifying your monthly payment. Enrollment can help to reduce financial stress as you know you’ll be on a path toward the solution. Visit Freedom Debt Relief to learn more about how a debt relief program works and can help get you on the road to financial freedom.

No matter the current status of your finances, there’s always room for improvement. It’s common for people to change their long term financial plan as they get closer to retirement, but it’s also important to revise your financial strategy in the short term to help address current concerns or reach new goals in the new year.

Whether your 2018 goals include getting out of debt, planning for retirement, or saving up for a home, these 10 tips could help you set yourself up for a successful year.

1. Initiate a Spending Review: If you’re looking for ways to cut spending because you want to save money or get out of debt, a spending review is a good place to start. Look at all of your expenses from last year. Were there any surprises? Should you have a separate savings account for vacations or taxes? By seeing the big picture, you can create a plan that matches your life.
2. Max Out Your 401K: People who want to save more for retirement may want to consider increasing their 401K contributions. First, see how close you are to the $18,500 annual maximum and increase contribution amounts accordingly. If you are age 50 or over, you can further increase the amount with a catch-up contribution of an additional $6,000. Keep in mind that this pre-tax deferment into a 401K account can help lower your tax rate.
3. Review Entertainment Subscriptions: In today’s subscription economy, you may be wasting money paying for services you rarely use. If you’re searching for an effortless way to save a little extra each month, evaluate which on-demand services you use all the time versus those you only use occasionally. Sometimes, with the occasional subscriptions, it’s less costly to simply buy the one things you like on that service—for example only pay for the season of particular TV show rather than a continuing subscription to a video service you rarely watch.
4. Rebalance Investment Accounts: As you change your financial goals, you need to change your financial strategy. Although some portfolio managers will rebalance quarterly on your behalf, at the minimum make sure it’s done once a year. Adjust the weightings of your portfolio so they’re more aligned to your new goals. Sell or buy assets to maintain your new desired level of asset allocation. By rebalancing in these ways, you can increase or lower the amount of risk for your investments.
5. Donate to Charities: Worried about tax season? Donating to recognized charities could help lower your tax bill. Whether you donate cash or household items, charities will issue you a receipt that recognizes the amount of your generosity—allowing you to write off your donations during tax time.
6. Fund 529 College Savings Plans: Whether you’re planning to go back to school or you want to help your kids pay for college, a 529 plan can help you save for school with pre-tax dollars. As an added bonus, you don’t have to pay federal or state income tax on the earnings, provided the cash is withdrawn to pay for college or graduate school tuition, fees, room and board, or books. Plus, in some instances, you may be eligible to get a state income tax deduction for your contribution.
7. Protect Your Identity: The beginning of the year is a great time to check your credit report and make sure that your identity is protected. By law, you’re entitled to a free credit report each year via AnnualCreditReport.com—this is the only site legally authorized to provide the reports for free. By reviewing your report, you can ensure you recognize all of the accounts in your name and that your credit is fully intact.
8. Evaluate Healthcare Accounts: If you have a Flexible Spending Account (FSA) ensure to use the funds before December 31st because as they say, “use it or lose it.” This is a good time for scheduling visits with eye doctor since FSA funds are good toward glasses, contact solutions, and more. Plus schedule other medical appointments since the funds can also reimburse copays. And if you have a Health Savings Account (HSA), then you might be able to rollover funds and continue to increase the savings you have for the later years—if this is the case, then you might want to consider contributing the annual maximum amount as this account can help during retirement.
9. Update Accounts and Documents: Whether its insurance amounts or legal documents such as trusts and wills, it’s smart to review these annually. You may change amounts or names of beneficiaries. For example, if you become a grandparent, then you may want to ensure your grandchild will have a nest egg toward college.
10. Evaluate Debts: There’s “good” debt, such as mortgages and car payments; however, sometimes other less healthy debts get on the personal balance sheet. Whether your debt has increased due to a medical procedure, unexpected home or car repair, or credit card bills, create a plan for paying these debts in a timely manner. And if you want to avoid getting stuck with high interest payments for years to come, try to pay more than your minimum payments each month.

If even paying your minimums each month seems too difficult to manage, you should explore other options for debt relief such as a debt consolidation loan or balance transfer credit card offers. Of course, the Freedom Debt Relief program could be a good fit if you are dealing with significant amounts of debt ($15,000 or more). If you qualify, we could help you get out of debt faster and for less than making minimum payments. See if you qualify now.

By taking these 10 steps, you’ll be ensuring an annual check-up that can help you set up 2018 for financial success.

Money is about more than the dollars in a bank account—it’s about emotions. Think about how an unexpected medical bill or a car repair might make someone feel panicked, embarrassed, or depressed. If you know someone who is dealing with stressful finances, you might feel helpless in watching them struggle. Talking about someone else’s financial debt is delicate, yet if you’re truly worried about someone you care about, it’s important to show that you care. However, before you approach the subject, don’t jump to conclusions—be certain there is a problem!

Here are signs that someone you care about might be struggling with debt:

• Previous Issues with Debt: Have they confided in you about debt problems in the past?
• New, Expensive “Must Have” Things: Do they always have the latest tech gadget, yet last week mentioned being worried about filling up the gas tank?
• Change in Weight: The last time you shared a meal, did they pick at the food or, on the opposite end, eat a fourth serving? Gaining or losing a significant amount of weight in a short time can be part of a coping mechanism for dealing with debt.
• Never Talks Finances: If money comes up in conversation, do they quickly change the topic? Avoiding talking about finances can often be because of embarrassment.
• Adjusting Spending Habits: This can work both ways—are they suddenly saying “no” to going to their favorite restaurant? Or if you’re shopping together, do they overspend on luxury items by using a credit card?
• Often Looks Tired or Mentions Insomnia: Have they talked about being exhausted or not sleeping well? Difficulty sleeping can be brought on by financial stress.
• Life Event that Impacts Income: Have they lost a job? Did they have a baby? Has their spouse died? All of these can tighten finances.
• Change in Emotional State: Are they reducing their social activities? Do they seem withdrawn, anxious or depressed?
• Mentions Money Worries: Did they say they’re living paycheck-to-paycheck, behind on bills, or running up debt?

If someone you care about is exhibiting many of the above signs of distress, then it may be time to assist them by offering to have a frank conversation about debt and by providing sound guidance. If after reviewing the above list it seems your friend or family member checks a few of the items on the list, then consider having the conversation.

Here are seven ways to approach a friend or family member who is in financial trouble.

1. Help, Don’t Judge: When you bring up the topic of debt, be aware of the tone in your voice—it needs be coming from a caring place and not the (and we’ve all done it!) tone of “I know it all and you should do it this way,” as the latter will not be helpful.
2. Reach Out and Ask: If someone has mentioned money worries in any form, it may be a request for help. Directly ask if they’re concerned about money. Or tell them how something you’ve observed them doing causes you to worry—such as shopping all the time or traveling every weekend. Let them know you’re concerned they’re putting themselves in a bad situation. Ask if there’s anything you can do to help, yet be mindful that if they say “no” or seem to ignore your inquiry, then it’s best to drop the topic.
3. Mention Your Own History of Debt: Speaking of how you were in a similar situation and that you found it overwhelming and stressful can help someone know that you fully understand. In addition, by explaining how you got out of debt, this can offer a ray of hope, while also mentioning the lessons you learned the hard way for maintaining a healthy approach to finances.
4. Be Supportive, Not Distracting: With family and friends, getting together often means spending money. Whether it’s going to dinner, a movie, or even a cup of coffee, these are expenses that someone with debt might not be able to afford. And if you continue to ask them to join in on the fun in this manner, then they may feel guilty or upset about having to say “no thank you.” Rather than continue to spend time in the same ways as before, let them know you still want to hang out together without having to spend money. Your friend or family member still needs a social life, so suggest a walk around the neighborhood, a bike ride at the park, or watching a movie at home. Remember that it’s support and not financial handouts that people want.
5. Offer Accountability: Whether it’s an exercise program or a financial diet, many people are likely to find success when they are accountable to someone else. Offer to help your friend with setting goals, have check-ins, and help keep them motivated by being a cheerleader for their successes.
6. Let Them Find the Solution: Even if you have the financial ability to help your friend, it’s up to them to find a debt solution. First, a generous financial offer of help may make someone feel beholden to you and that they are now in debt to you! Second, if they have ownership for deciding the best course of action, then this can help ensure they learn to manage money more effectively.
7. Recommend a Debt Relief Program: Suggest they look into a debt relief program like the one offered by Freedom Debt Relief. Such programs can help them reduce the amount they owe and put the debt behind them faster that they could on their own. Even just making that first phone call for a debt evaluation could help reduce their money stress and that terrible feeling of being overwhelmed. Make sure to select a program with a company that is a member of the American Fair Credit Council (AFCC).

It’s important to always approach the topic of finances with empathy. It’s even more valuable for a friendship to drop the subject if someone is not ready to talk about their finances. You understand it’s their life to live, plus by respecting their privacy, you’ll let them know that you’re a fabulous friend who is here for them and, most importantly, that you care about them.

If you’ve ever applied for a mortgage or loan, you may have heard the term debt to income ratio. But you may not have learned what it really means, let alone how to calculate it or how it has to do with the rest of your finances.

Debt to income ratio might sound like an overly complicated term. In reality, it’s a simple concept that could help you understand and even improve your financial situation. Here’s what you need to know about your debt to income ratio.

What Is Debt to Income Ratio?

Debt to income ratio is the percentage of your monthly income that goes to paying debts. Creditors calculate your debt to income ratio to find out how much additional debt you can take on.

A lower debt to income ratio could make it more likely to get approved for a loan or mortgage. If a creditor sees that your debt to income ratio is too high, on the other hand, they may view you as a risky borrower.

Calculating your debt to income ratio is easy. All you have to do is add up all of the monthly debt payments you make to credit cards, personal loans, mortgages, and any other debt, and then divide that number by your gross monthly income. After that, you multiple the number by 100 to get the percentage of debt to income.

For example, if you put a total of $1,500 towards your debt every month and your monthly income before taxes is $6,000, your debt to income ratio would be 25%. In mathematical terms, here’s how you calculate debt to income ratio:

[Total Debt Payments]÷[Gross Income])x100=[Debt to Income Ratio]

How to Tell If Your Debt to Income Ratio Is Too High

If your debt to income ratio is below 36%, most creditors will consider you for a new loan or mortgage. If it’s between 37% and 49%, some creditors might view you as a credit risk but may still lend to you. But if your debt to income ratio is above 50%, most creditors could reject your application for a new line of credit.

Keeping your debt to income ratio low is a good idea—especially if you plan to take out a large loan or mortgage. But it’s not the only factor that helps creditors decide if they should lend to you. Your credit profile is also a big part of their decision making process.

Many people think that your debt to income ratio and credit profile are the same thing—but that’s not true. That’s why it’s important to know the difference between credit profile and debt to income.

Credit Profile vs. Debt to Income Ratio

Even though a low debt to income ratio could help you qualify for a loan, your credit profile is also an important consideration for many creditors when they decide whether to lend to you. While your debt to income ratio might help a creditor decide how much to lend to you, your credit profile helps them choose the length of your loan and your annual percentage rate (APR).

Before they decide on your loan terms, almost every creditor looks at your credit profile,. Factors like your payment history, credit utilization, and credit history contribute to your credit score and help creditors determine your likelihood to pay back the loan.

At the end of the day, both your credit profile and your debt to income ratio contribute to your credit worthiness. So if you have an excellent credit profile and low debt to income ratio, you could be a good candidate for a loan.

What No One Tells You About Your Debt to Income Ratio

Your debt to income ratio isn’t just a number that creditors use to decide how much they should lend you—it could also indicate your overall financial wellbeing. If you have a high debt to income ratio, chances are that you might not be able to save as much as you would like each month.

Similarly, you may not feel prepared for an unexpected financial hardship—like a job loss, or illness. To make things worse, you may not have an emergency fund to cover you in case you get hit with an expense you didn’t plan for.

Even if your debt to income ratio is hovering around 35 or 40%, your finances might be in danger without you realizing it. A high debt to income ratio could mean that you have high credit utilization. And since credit utilization makes up 30% of your credit score, high debt to income might be an early sign of declining credit.

The bottom line is that your debt to income ratio could clue you into the fact that you’re spending too much on debt, and not enough on your future. Reducing your debt to income ratio is not just a good idea if you’re applying for a loan or mortgage—it could also improve your overall financial wellbeing. While there are many ways to reduce your debt to income ratio, some methods are better than others.

How to Reduce Your Debt to Income Ratio

If you want to reduce your debt to income ratio, making minimum payments could be a bad choice. Paying the minimum payments could take you years to pay off debt and cost you thousands in interest alone. And if you want to accomplish big financial goals, making minimum payments could delay your plans indefinitely.

Consolidating your debt with a personal loan could be a better choice than making minimum payments, but you might have trouble qualifying if your debt to income ratio is already high. Since debt consolidation loans are just another form of debt, you still have to pay interest on top of your principle debt. To make things worse, your new rate may not be much lower than it is on your current debts because it’s hard to get a loan with a favorable rate and terms if you have high credit utilization.

Debt negotiation could be the right choice for many Americans who are struggling with high debt to income ratios. Companies that offer debt negotiation, like Freedom Debt Relief, could help you get out of debt faster than minimum payments and for less than what you currently owe. In fact, enrolling in the Freedom Debt Relief program could help you reduce your debt to income ratio and get rid of debt in as little as 24-48 months.* To find out if our program is right for you, visit our website or request a free debt consultation now.