Credit, Credit Score, Financial Advice

Why Your Debt-to-Income Ratio Is So Important

A person’s credit score is not the only figure lenders look to when determining whether to approve an application for financing. Many times, lenders will also look to the applicant’s debt-to-income ratio (DTI) when making a determination to approve financing.  

A consumer’s debt-to-income ratio looks at whether the individual is bringing in enough income to meet his or her monthly bills. The actual DTI figure is computed by taking the consumer’s gross monthly income and dividing it by his or her monthly debt payments. The result is the person’s DTI.  

Every lender looks at the DTI ratio differently. For some, the credit score makes all the difference, while others will weigh the DTI ratio heavily when making a decision on lending.  

Essentially, the DTI ratio allows lenders to assess a potential borrower’s financial stability. Someone with a high DTI may indicate that a person is barely making ends meet, and lending additional financing would be a risk.

According to Wells Fargo, a stable DTI ratio range is anything below 35 percent. With a DTI of 35 percent, a consumer should have enough money left over every month after paying his or her bills.  

A DTI between 36 and 49 percent is considered manageable, which means that the applicant’s situation is acceptable. A DTI of 50 percent or higher is not acceptable. This high of a DTI shows that the individual consumer’s debt payments take up a substantial portion of his or her monthly income.

If a consumer is looking to be approved for a mortgage, the role his or her DTI plays in the approval process is a little more complicated. Mortgage lenders will look at two different types of DTI ratios when making lending determinations. One DTI ratio is called the front-end ratio, and this looks at how much of the consumer’s gross income will go towards his or her housing costs. An ideal front-end DTI ratio is 28 percent or lower.  The back-end DTI ratio looks at how much of the consumer’s gross income goes towards payment on all debts, including housing costs. Lenders look for back-end DTI ratios of 36 percent or lower.  

A person’s DTI can be improved by several methods. First, the ratio can be improved by increasing the amount of income brought in monthly. Keep in mind, this method takes time and is not an overnight fix by any means. In fact, many lenders will not count income that has just started. They look toward longevity and stability, instead.  

It may be best to work at lowering the monthly debt payments that are made every month. Consumers who are serious about reducing their monthly payments should review their spending habits to see where certain cuts can be made. It may be wise to tackle certain debts first, paying them off to eliminate debt. Credit card debts and similar revolving unsecured debts should be focused on first before tackling installment loan payments. If a consumer has multiple credit card payments, it may be wise to consider debt consolidation in an effort to reduce how many payments are made, lower the monthly payments, and reduce the interest rate paid on the debts.   

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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.   

Credit Card Debt, Debt Relief

The Best Way to Conquer Credit Card Debt

Many consumers find themselves still struggling with large amounts of credit card debt. Much of this credit card debt is carried over from previous years. Certain steps can be taken to tackle credit card debt and either pay it off in full or reduce the amount owed to a more reasonable number.   

The first step is to push the pause button on spending and inventory the situation. The consumer’s debt cannot be conquered until the spending stops. It is important to review what has been purchased the past few months, determining how much has been spent and what is owed. It also helps to write down what the interest rate is for each card, noting the balance owed and the minimum monthly payment. Taking this first step will allow the consumer to be able to put together a budget and a plan to pay off the debt over time.  

Once the consumer has a chance to review his or her debt situation, the next step is to select a strategy to pay down the debt. Two of the most common methods include the snowball method and the avalanche method.  

With the snowball method, the consumer arranges his or her credit card balances from smallest to largest balances. The consumer focuses his or her attention on the card with the smallest balance first, paying down as much as possible on that card while continuing to make the minimum monthly payments on the other cards. Once the first card is paid in full, the consumer focuses on the card with the next smallest balance until all cards are paid off in full. The snowball method requires a great deal of patience and discipline, but it can be an effective way to pay down debt. However, this method does involve paying more in interest over time since credit cards with higher balances tend to have higher interest rates. 

The avalanche method works similarly to the snowball method, but the consumer focuses on the credit card with the highest interest rate first. This method allows the consumer to get out of debt quicker than the snowball method since it focuses on the larger balances with the higher interest rates first, but it can be hard to stay motivated with this method since seeing the results of the consumer’s efforts can be harder to immediately see. 

Another method to pay down credit card debt involves consolidating the debt through a personal loan or balance transfer.  Many credit card companies offer balance transfers, allowing the consumer to transfer multiple credit card balances to one card with a zero or low introductory interest rates. It is important that the consumer pay the balance down before that promotional period expires, however. Otherwise, the interest rate can skyrocket at the end of the promotional period, leaving the consumer in a worse position than before. A personal loan can also be used to pay off all the consumer’s credit card balances. This method allows the consumer to focus his or her attention on one, fixed monthly payment over time in lieu of multiple credit card payments.      

Please click here to read more.  

If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.   

Medical Debt

The Reasons to Avoid Paying Medical Bills with Credit Cards

Most people hope to avoid having long-term medical debt on their credit report, which is why it can be tempting to want to pay off medical debt with a credit card. However, the consequences that come along with using one form of debt to pay off another can be enough to want to keep anyone from taking this route.   

Medical debt is reported to be the number one cause of U.S. bankruptcy filings. It has been reported that over two-thirds of all bankruptcies between 2013 and 2016 involved medical debt. According to a 2019 study, one in every three households carried credit card debt after using credit to pay off medical bills.  

Credit Card Debt, Debt Relief

Best Ways to Pay Off a Large Credit Card Bill

Many Americans ended the year 2020 with large credit card balances, and now with the new year in full swing, they may be looking for ways to chip away at that debt. Carrying a high balance on credit cards not only makes life harder, but it can present a major threat to that person’s financial stability. Several different options are available to consumers seeking to reduce or pay off their large credit card balances. What works for one consumer may not work for another. Ultimately, it depends on the person’s credit history and current financial situation as to what will work for him or her.  

Personal Loans 

One popular method to pay down a credit card has been by taking out a personal loan to pay off the balance. This method is also known as debt consolidation, and it can be a successful way for consumers to pay down several large balances at once. By taking out a personal loan, he or she can use this money to pay off all these outstanding balances, leaving just the loan balance to pay a monthly basis. It effectively transfers credit card debt to a one, singular debt with a lower interest rate. Not only does this make repaying the amount easier, but it can also often save a lot of money in interest that would otherwise build up over time on multiple credit card balances.  

COVID-19, Credit Card Debt

Credit Card Debt Falls 9 Percent Despite Decline in Economic Conditions

The coronavirus (COVID-19) pandemic has hit the country’s economy hard, but this fact does not seem to be reflected in the nation’s credit card debt According to statistics from credit reporting agency, Experian, credit card balances have declined at a record rate in 2020.  

Economic crises tend to lead to a change in consumer behavior. World War II pushed consumers to change their spending habits in ways they had not done before. The COVID-19 pandemic with forced lockdowns and widespread unemployment has likewise put things into perspective for American consumers, pushing them to change their spending habits, as well, including how they use their credit cards.  

Coronavirus, COVID-19, Credit Card Debt

More Americans Paying Rent on Credit Cards with No Second Stimulus Relief Bill in Sight

The coronavirus (COVID-19) pandemic has hit the country hard.  Many people have been left with no choice but to use their credit cards to pay for basic living expenses, including their rent. Financial analysts fear that this trend could be a warning sign that, without a second stimulus relief package from Congress, the nation’s economy is heading towards another crisis.  

According to statistics from the Federal Reserve Bank of Philadelphia, an increase of approximately 70 percent has been reported on the number of consumers using their credit cards to pay their rent. What this indicates is that the person using their credit to pay for the most basic of living expenses is significantly struggling, does not have any savings to pay for unexpected expenses, and is at risk of losing his or her home.  

Credit Card Debt

The 5 Best Ways to Pay Down Credit Card Debt during COVID-19

The coronavirus pandemic has compounded the stress of credit card debt for many Americans today.  Consumers have relied more than ever before on their credit cards to cover bills and necessary purchases due to the financial impact related to job losses and shutdowns.  The following methods can prove to be helpful for consumers looking to pay down their credit card debt during the COVID-19 crisis.  

Debt Snowball Method 

One method of paying down credit card debt which many consumers have had success with is known as the debt snowball method. This method works by focusing all payments on the credit card with the lowest balance first, while making minimum payments on all others. Once that card is paid in full, the consumer then focuses on the one with the next lowest balance, and so on, until all credit cards are paid off in full. By taking the smallest balance first, the consumer is likely to see progress being made paying down his or her debt. Seeing the actual progress can be motivation to keep paying down all remaining credit cards. This method is not a quick fix, however, although it does work successfully over time.  

Credit Card Debt

What to Do After Paying Off Your Credit Card Debt

Credit card debt is a source of stress for many consumers. Once a large balance is accrued, the high interest rates can make credit cards nearly impossible to pay off.  Whether you have been able to pay off your credit card debt or have had the debt discharged in bankruptcy, it is important to modify your financial behavior moving forward.   

Monitor Your Credit Score 

Consumers should monitor their credit reports on an annual basis to ensure that there are no inaccuracies. Once a credit card is paid off in full, that should reflect on the person’s credit report. Additionally, paying down a large sum of debt will have a positive effect on the consumer’s credit score. As the person’s credit score goes up, his or her chances of being approved for financing in the future also improves. After paying off debt, the consumer should check his or her credit report to ensure that this payment is reflected on his or her score. To make sure that the consumer’s credit score improves, periodic monitoring of his or her credit report should also occur.  

Coronavirus, COVID-19, Credit Card Debt

How the Pandemic is Changing Americans’ Credit Card Habits

The coronavirus (COVID-19) pandemic has changed the way of life for consumers in both good and bad ways. One change has to do with the way Americans utilize their credit cards post-pandemic. 

A recent study conducted by Money and Morning Consult surveyed how American consumers have been using their credit cards during this crisis. What the study found was Americans are continuing to use their cards. However, the way by which they are using their cards has changed.  

Credit Card Debt, Debt Relief

Average American Consumer Carries over $90,000 in Debt

Most American consumers carry some form of debt. In fact, debt has become a way of life for many Americans. Whenever a big purchase needs to be made, consumers will often apply for financing to pay for this purchase. This can include items like a home, car, furniture, or even for basic purchases.  

According to data from the credit agency, Experian, as of 2019, the average American consumer has $90,460 in debt from various sources, including mortgages, student loan debt, personal loans and credit cards. Escaping this debt load can be tricky, and Experian’s data shows that certain generations struggle more than others when handling consumer debt.