Reduce your debt

Can you easily manage your monthly loan payments? Or do you often run out of money before you run out of month? From the following list, total your current required minimum monthly payments.

  • Car #1 -
  • Car #2 -
  • Car #3 -

2 Lenders would probably use income from the past two years and the year to date. However, this example illustrates the principle.

  • Motorcycle -
  • Jet ski -
  • Power boat -
  • Furniture -
  • Student loan(s) -
  • Appliance -
  • Credit card #1 -
  • Credit card #2 -
  • Credit card #3 -
  • Credit card #4 -
  • Medical bills -
  • Alimony -
  • Child support -
  • Merchant account #1 -
  • Merchant account #2 -
  • Merchant account #3 -
  • Judgments/liens -
  • Personal loans -
  • Mortgage #1 -
  • Mortgage #2 -
  • Other -
  • Other -
  • Other -
  • Other -
  • Other -
  • Total monthly debt repayments = $_

What to Count, What to Leave Out

To calculate the total debt ratio, lenders usually divide your monthly payments into two types: (1) installment debt, which includes self-liquidating debts such as autos, boats, medical bills, and student loans; and (2) revolving (or open) accounts which include Visa, Mastercard, AmEx Optima, Home Depot, Heloc (home equity line of credit), and any other types of credit lines that remain open until you or your creditor closes them.

Not All Payments Count

Most lenders delete payments for installment debts that are scheduled to be paid off within 6 to 10 months. However, if your auto lease will expire shortly, those payments may still count against you. The lender assumes (unless convinced otherwise) that you will continue to pay this expense because you soon will sign a lease for a new car to replace the old one.

You do, however, get a break for qualifying when lenders look at your revolving debt. Even if you regularly pay hundreds of dollars more per month than your minimum payment(s) due, most lenders will only count your payment as 5 percent of your outstanding balances. Or when less than 5 percent, your actual minimum required payments—providing you ask the lender to do so.

Prepare Well in Advance

As with proving your qualifying income, prepare your desired debt profile as soon as you can. Not only will this tactic lift your qualifying ratios, it may also boost your credit scores. Here are some tips:

  • Consolidate bills: One payment of $280 a month will hurt you less than four payments of $125; however, don't close three accounts and then run one up close to its credit limit. Credit scoring doesn't like high balances relative to card limits.
  • Pay down debt: If your installment debt has only 11 or 12 months to go, prepay two or three payments. That pushes those debts off the table and out of sight—under the rules followed by many lenders.
  • Pay off debt: If you can swing it, get rid of as much debt as you can.
  • Avoid new debt: The less your debt, the better you look. Even if you can afford them, avoid new loans.

Remember, destructive debt destroys your ability to build wealth; it destroys your ability to borrow constructively to finance wealth-producing assets such as real estate. You cannot achieve financial freedom if you enslave yourself to car loans, credit cards, and other degrading types of debt.


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