Debt is one of the most challenging burdens for most Americans today. While the economy is thriving, many Americans have increasingly become weighed down with substantial debt. Part of the debt difficulty for many people stemmed from the years when the economy was doing poorly. This had left a sizable amount of the population with debt carried over from previous years when the economy was not growing.
However, presently there is also a surge of new debt from people spending too much money before they make it. Often when the economy improves, people feel a greater sense of confidence in their ability to ensure a higher personal income, so they rack up more debt.
The trend towards increasing debt during these times is not unusual. In fact, during both good and bad economic times, credit card debt and other forms of borrowing are often catapulted into higher realms than people can afford, albeit for different reasons.
However, high amounts of debt can harm many parts of a person’s life. Understanding the cause and effect of significant debt can help people make better decisions about their finances and their financial future.
The Restrictive Nature of High Debt
High debt can restrict a person’s ability to advance in their life in several important ways. Excessive debt often means that more of a person’s income goes towards paying for debt expenditures than is wise. This leaves a person less money for their living expenses and savings.
Additionally, high debt can make purchasing new things difficult and costly. People who live with extensive debt often find they are unable to afford to buy new things they need when the need arises. Because their debt load is high, they may be unable to afford even simple items such as a new appliance when needed.
For more expensive items, high debt borrowers may find that because of their existing debt, they are unable to afford payments for new items they wish to buy. They may also get denied the credit to finance new things they need or desire.
For young people starting out, excessive debt also plays a role in being denied for more substantive purchases like a home. This happens quite frequently for young borrowers who are unsure of what the mortgage criteria are.
In most cases, mortgage companies and banks consider many factors to qualify their borrowers. A high debt to income ratio is one of the primary reason’s mortgages get denied. Having a higher income is not a benefit to applicants if they have high debt that consumes much of their income.
Debt and Lack of Savings
People who have a higher debt to income ratio also usually have a low amount of savings. This can become a cyclical problem because it places the high debt person in a difficult situation if an emergency arises. In these cases, they may be left without the proper funds to remedy the emergency.
On a long-term basis, people with high debt often have significant problems with building a retirement income. In the short term, this may seem insignificant. But the lack of money in savings can prove very problematic as people get older.
Debt and High-Interest Rate Borrowing
One of the other significant concerns for people with high debt is they are more inclined to have debt with higher interest rates. This is a significant problem for some borrowers.
In general, people with higher debt ratios pay higher interest rates on their credit cards, personal loans, car purchases, and their home mortgages. In some cases, the borrower’s high-interest rates may not reflect their credit scores but their income to debt ratio. Many people with good credit are overextended in their financed debt.
For a lending facility such as credit card companies, personal loan companies, car financing lenders and home mortgage lenders, debtors with higher debt to income ratios are considered a much greater risk. This is true even when they make on-time payments, and their overall credit score is good.
The basis of the risk assessment for lending facilities for high debt consumers is that their higher debt may cause them to default. Usually, lender applications consider the applicant’s current debt and how much of their income is presently being paid out to debt.
Rebuilding a Life with Lower Debt
One of the greatest challenges for people who have a high income to debt ratio is lowering their monthly payments. In many cases, people have simply become accustomed to having higher monthly payments. The cycle is often continuous and can make it more difficult to break the cycle. Especially if this high debt and high monthly payments have become the normal way of living for a long time.
One of the best ways to accomplish change is to set a plan and begin to understand the cause and effect of income to debt ratios and credit scores for borrowing. One of the first places that a borrower can look to make changes is examining the debt they have that is the most expensive. This is the debt that should be reduced or refinanced as quickly as possible.
One of the easiest places to look at reducing monthly debt is evaluating current credit card debt. This is the area where most borrowers spend the bulk of their monthly income on payments. It is also the area that can be easiest to make some changes.
If a borrower has a few good credit card interest rates and some that are more expensive, borrowers should look at increasing their credit limits with the lower interest rate credit cards. The amount of the credit increase can be used to pay down the more expensive credit card debt. This will automatically start to reduce the amount of money paid out each month.
Some credit card companies will allow borrowers to transfer credit card debt from one company to another. This is called balance transfer credit card shopping and is quite common.
One of the best options is getting a debt consolidation loan from a company like Dutchess Partners. This is a great way for borrowers to drop their monthly bills and keep solvent substantially.
Credit card debt is one of the most expensive ways of borrowing because annual interest rates can be quite costly. By obtaining debt consolidation loans such as those offered by Dutchess Partners, borrowers can potentially save hundreds on their monthly bills. This will significantly improve their income-debt ratio and their credit scores.
Credit card debt, furniture and appliance loans as well as personal loans are the most common types of financing that are refinanced with debt consolidation loans. These loans are a great way to reduce monthly expenses and have a single monthly payment instead of five or six credit card bills. Debt consolidation loans can pay off credit card debt as well as high-interest personal loans.
Reducing Personal Expenditures to Reduce Financed Debt
Once personal monthly debt payments have lowered, it’s important to look at ways to lower monthly debt regularly. A great place to look for cost savings is personal expenditures. Reducing expenditures at home can result in greater cash flow. This can help significantly if some of the saved money is then used to pay down credit debt.
Sometimes it can be as easy as eating out less, making baked treats at home for the week, or buying premium premade coffee mixes at the grocer instead of getting a fresh cup of daily specialty coffee. While these may seem to be small expenses, they add up over the year and amount to substantial savings.
As an example, Starbucks sells its flavored coffee blends premade at many grocers across the country for $4.50-$5.50 for 40 ounces. The average daily flavored Tall Starbuck ‘s coffee is 12 ounces and costs between $3 and 4 dollars. That means a daily Starbuck’s visitor will spend an average of $90 to 120 dollars per month on their morning coffee.
The savings created is a basic math equation. If the grocer premade flavored Starbucks coffee blend is enough for three days, then a consumer has just saved between $4 and 5 dollars every three days. Within a month, the savings could end up between $45 and 65 dollars.
When used properly, the monthly savings can then be used to pay down credit card debt or put in savings. While this may seem a nominal amount of money, it is substantial in the long term. Within a year, the savings for an avid Starbucks coffee drinker would be between $540 and 780 dollars. This process can be repeated for various other areas to compound the progress.
This may seem simple enough math, but many people get caught up in wanting to keep the status quo. However, long term the status quo can be a financial disaster. Once income and debt ratios are in better alignment, borrowers will experience more freedom in their abilities to handle expenses and build savings for their future. This will open greater opportunities to borrowers and create greater financial freedom.