Debt repayment in manageable steps

By Michael Camacho

For Pacific Daily News

July 4, 2011

Debt is a part of life. But there are times when you can become overwhelmed with debt — you’ve gotten used to sending off only minimum payments, you start missing due dates, and you begin having trouble sleeping. You can’t seem to save for your larger goals, and you watch as your debt drains money away from your other expenses.

At this point, it’s time to get back in control  of your debt. Your first step is to figure out where you stand.

• Take stock. We’ll start with a simple snapshot. Pull out a piece of paper or a spreadsheet, and list the following headings as your columns: Name of loan, current amount due, interest rate percent, minimum payment, time until payoff, and amount at payoff.

• Start with your installment loans (home, car, home equity, student, and personal loans). Then, move on to your credit cards. Your most recent credit card statements will give you the amount of time it will take to pay off your cards at the minimum level, as well as your final payoff amounts.

•Find your Debt to Income Ratio. This ratio can tell you objectively whether or not you have too much debt. It’s a good indicator of your financial health, and lenders use this ratio to help determine if you qualify for loans.

• Here’s what you do: in the “Minimum Payment” column on your spreadsheet, total all of the amounts you’ve listed. Take this total, and divide it by your monthly gross income. If you have $500 worth of minimum payments, and you make a $2,000 gross salary every month, you’ll have a Debt to Income Ratio of 25 percent.

• Aim for a ratio of less than 30 percent. Lower is better. If your ratio climbs past than 30 percent, you’ll begin having trouble being approved for loans. Anything much higher than 30 percent is a sign that it’s time to focus on paying down your debt.

• Create your own “Time Until Payoff” on your credit cards. When you’re paying down debt, you should focus on the accounts with the highest interest fees. More often than not, these will be your credit cards.

• Let’s look at your spreadsheet again. Next to your minimum payments for your credit cards, you’ve listed the expected time until payoff. If you have a large balance, this amount of time can stretch past a decade or more.

•You may not want a bill hanging around that long. Maybe you want to invest in a house or start a family in a few years, buy a car or start your own business. You’ll need to devote more income to such goals, and you’ll also need a lower debt-to-income ratio.

• So take some time to think about your goals. Then come up with a target date for your credit cards — how soon do you want to be debt free, so you can pursue those goals? Two years? Five years?

A credit card pay-off calculator like the one available on Bankrate.com can help you determine new “minimum payments” you decide on, in the time frame that you choose. Also check the 3-year payment amounts listed on your statements. Record these new numbers on your spreadsheet: they’ll help motivate you to pay down your debt.

In next week’s column, we’ll look for money in your budget, so you can meet your new goals.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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