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Your debt-to-income ratio is the amount of your income that you spend on debt each month. The less your debt-to-income ratio, the better because it means you aren’t spending most of your income paying debts. However, if you have a large debt-to-income ratio, this means you have more debt than income. As a result, you are caught in a debt cycle whereby you have to keep borrowing money to stay on top of your bills. Fortunately, there is a way out of this cycle.
Follow the five steps we’ve outlined below to help you get out of the debt cycle
Consolidate Your Debt
One of the ways to escape the debt cycle is through debt consolidation. Debt consolidation allows you to combine all your debts into one loan, with one interest rate and one payment. The benefit of this is that you don’t have to keep track of multiple bills, and you don’t have to contend with varying interest rates. In doing so, you can ensure that your payment doesn’t exceed your income and allows you enough money left over so you can manage your living expenses without having to borrow additional funds.
Cut Down On Expenses And Look For Additional Income Opportunities
According to 24/7 Wall St., most households waste between 10 and 15% of their monthly income on unnecessary purchases. As a result, there are likely some things you can cut back on.
You need to go through your spending and identify unnecessary expenses. You should cut these from your budget immediately. Look at things like dining out, apparel, and entertainment.
Additionally, you should look for ways to increase your income. For instance, you could get a part-time job, perform odd jobs, or start a side gig. You could even sell some of your unused household items.
Handle Creditors And Debt Collectors
If you’re in a situation where you have more debt than income, you’ll likely have to deal with debt collectors at some point. When dealing with debt collectors, you must understand your rights. For instance, you have the right to ask a debt collector to stop calling you or to only call you at certain times. Therefore you should make sure to inform yourself about the debt collection laws in your area.
Furthermore, it’s a good idea to get in contact with your creditors to explain your situation. In most cases, the creditor will help you to develop a payment plan you can handle.
Take Care Of The Most Important Items First
Even if you cut down on expenses, you may not be able to pay everything off at once. Instead, you’ll need to prioritize which bills and debts you pay off first. To do this, you should first look at your secured debts. These are things like your mortgage and car loan. If you don’t pay these debts, you may lose important assets. After all, you need a house to live in, and you likely need a car to get to work. Furthermore, you should consider essential bills such as utilities and insurance. These debts should get priority because they’re essential to your well-being.
Reconstruct Your Credit
If you have more debt than income, your credit has likely been impacted. As a result, you’ll need to re-establish your credit to get back on track. A good way to start reconstructing your credit is through a secured credit card. A secured credit card is a credit card that is backed by a cash deposit, which acts as collateral if you default on your payments. Due to your financial situation, it is unlikely you will qualify for an unsecured card. However, making regular payments on this card will improve your credit score.
It may seem like you’re trapped in an endless cycle of debt when your bills amount to more than you make, but there is a way out. However, it takes work. You will need to cut down on expenses, and you may have to take on additional work. You may also need to consider consolidating your debt, working out a payment plan with creditors, and prioritizing the bills you pay. Finally, you will need to build your credit back up, as it will likely have taken a hit because of your debt-to-income ratio.