The relationship between borrower and lender has existed since time immemorial. On its own merits, debt isn’t bad, but a necessary factor charging the financial system. The problem arises when it accumulates too fast, becoming anathema to individual and institutional net worth.
Here’s how the game works: Banks assess a customer’s creditworthiness based on the debt to income ratio. Generally speaking, total debt should hover around or below 30% in order for one to be considered a healthy borrower. As it approaches 40% and higher, the chances of successful credit applications begin to fall drastically. Even worse, interest rates are sky-high for those labeled as sub-prime – things become more expensive essentially.
Here are some warning signs indicating a debt-heavy profile:
- Spending more than what comes on a monthly basis
- Staggering bill payments or having to choose which ones to pay
- Making minimum payments while maxed out on credit cards
A great part of acquiring and integrating wealth according to planned portfolio characteristics includes properly handling credit risks. Mastering the financial game rests on the balance between income and the ability to service debt at the end of the day. Like anything else, there needs to be a set of budgetary principles that one can use to increase financial stability. A carefully thought out Debt Management Plan (DMP) can help minimize and manage debt within a goal-oriented framework. What does one of these plans look like exactly?
Debt Management Planning
1. Creating a budget
The first step is always the most difficult – create a strict budget and follow it religiously. Gallup polls have revealed that just under one-third of Western households bother to create one and even less stick it out. This is a tall-tale reason why most manage to spend more than what they earn in a year on year basis.
2. Run a strategic debt reduction program
Prioritize paying down high-interest rate accounts – then focus on the smaller fish. While some parties choose to go a different route, it’s always important to keep consistent reduction in mind irrespective of tactics.
3. Change lifestyle habits
This is the most practical, yet proves to be one of the hardest concepts to follow through on. Simplicity in living can mean driving an older, used vehicle or moving where rent or mortgage is cheaper. Cutting back and spending less never hurts the pocketbook and boosts repayment reserve levels.
4. Expand earning horizons
Look into possibly getting a higher paying job or picking up a part-timer. Plus, extra coin in the bank makes saving that much easier at the end of the day. One concrete savings goal to hold near and dear is the 15% threshold. Statistics show that those who are best with money routinely hit this target.
5. Speaking with creditors
It may seem counterintuitive to try to negotiate with creditors, but that’s exactly how the financial savvy to build relationships, foster trust, and maintain creditworthiness despite potential setbacks. Although lenders appear rigid, many are happy to assist in developing revised payment schedules on behalf of borrowers. Showing them discipline and commitment restores confidence, leading to decreased interest fees.
Debt Types Included in a DMP
Lenders are classified as unsecured creditors because they make loans without requiring any pledges from the borrower. Default won’t lead to asset forfeiture, but the high risk, low recourse nature of such a transaction leads most lenders to exhaust all recoupment options. The people over at Money Expert recommend creating a Debt Management Plan, which addresses unsecured debt included, but not limited to:
- Credit Cards
- Medical Bills
- Collections
- Retail Cards
- Personal Loans
- Repossessions
Debts secured by collateral are ineligible under an established DMP.
Benefits of a Debt Management Plan
An ongoing financial support system underscores the actionable wherewithal when reducing debts and lowering interest rates. Enrolling in a DMP contributes to payment consolidation and late fee elimination – two crucial aspects of assistance. A certified counselor can run a debt to income ratio assessment and figure out the best course of action according to each circumstance. They will also speak with your creditors so you don’t have to.
Carrying on with debt can be stressful, however, it doesn’t have to be. What does being able to pay 0% interest mean to you? Is boiling everything down to one, low monthly payment possible? All of this and more can be achieved after the installation of a DMP that is tailored to your budget. Most assistance programs operate on a three to the five-year timetable. Program enrollment usually has zero impact on credit scoring profiles.
