8 Ways To Get Control Of Your Debt
Even with many mortgage loan programs accepting DTI (Debt To Income) ratios upwards of 43 - 45%, you may be looking for ways to lower your existing monthly obligations. Here are some tips you can use to get control of your debt, no matter where you are in the home-buying process.
1. Create a budget
The only way to know how much you are spending is to create a budget. Putting a budget together can be easy: there are many budget apps or software programs that will guide you through the process. Or you can put together a budget spreadsheet. Make sure that all of your monthly bills and obligations are accounted for. Then, for a minimum of one month, track all of your spending.
2. Examine your spending habits
Tracking all of your spending may seem tedious, but it is a very valuable exercise. Small day-to-day purchases can really add up. Are you paying for a latte every morning or lunch out every afternoon? Make coffee at home instead of paying for a drink at a coffee shop, and you could save $1,000.00 or more a year.
3. Stop nonessential spending
Now that you know where your money is going it is time to take it back. That means cutting out nonessential purchases: start making your own lunch instead of buying one, make coffee at home, watch a movie at home instead of purchasing movie tickets (or at least skip the concession stand), update your streaming services and delete the ones you don’t use, and if you aren’t using your gym membership, ditch it. You will be surprised at how much money you can free up every month when you stop paying for things you don’t need.
4. Pay bills on time
When you stop spending money on nonessential items, you will have more cash on hand and this means you should be able to pay your essential bills on time. Late payments can not only cost you a lower credit score, they can also cost you late fees and fines. Put on-time payments at the top of your priority list and you can save money and improve your credit over time.
5. Create a debt payoff plan
Take a look at your existing debt and make a plan for paying it down. One way to payoff your debt is from highest interest rate loans to lowest. Organize your debt by interest rate so you know which accounts to focus on first. Once you have eliminated your highest interest rate debt, apply that payment to the next highest interest loan/credit card until that is paid off and continue down the list.
6. Pay more than the minimum
If you want to pay down your debt faster you will want to consider making more than the minimum payments. Here’s where you can start to see some real results from examining your spending habits and stopping nonessential spending. If you cut out your latte-a-day habit and started making coffee at home, you could pay an extra $100 each month on an existing debt. If the minimum payment on that account was $50, once you have paid that account off you can then apply $150 a month over the minimum towards the next debt you pay off.
This method, known as the “debt avalanche”, will continue to pick up momentum and speed as you rapidly pay off your existing debt and all you had to do was pay more than the minimum payment on your highest interest account (and start making some coffee at home).
7. Take advantage of zero-interest balance transfers
As your existing debt begins to diminish, and you begin to take control over your finances, there is a very useful tool that can help you along the way: zero-interest offers. If you qualify for a credit account with an initial zero-interest period it can help you pay down debt even faster. Zero-interest balance transfers typically have a period of 12, 15, or 18 months at zero interest and then a higher interest rate after this introductory period is over. To make this tool work for you it is best to have a plan to completely pay off the debt during this zero-interest period.
Warning: Zero-interest balance transfers can backfire and work against you. If you open a new credit account and start spending on it, it will add to your debt. Opening a new credit line can also be detrimental to your credit score. Only consider this tool if you can be responsible with your spending and know that you can pay off the debt amount within the zero-interest period. Never open a new line of credit if you have already applied, or have immediate plans to apply, for a home loan/mortgage loan.
8. Put bonuses and cash gifts towards debt
Sure, you want the newest gadget or gizmo, but an annual bonus or cash gift can go towards something a bit more useful for your financial future: paying down your debt. If you are serious about getting your debt under control, paying off your existing high-interest accounts, and buying a home, rethink unexpected gifts of cash as “debt-gifts” instead.