I was on the web and found this article interesting. It's a mathematical approach to understanding your debt and how to act on the info. It really shines a light on the cross section of one's debt!

Crunch the Numbers to Chomp Away at Debt:
A mathematical approach to solving your debt problem.

Author: Dennis Strzegowski




Step 1: Determining Expenses

Before we can decide which program will be the most efficient, we must fully understand your current cash flow situation. Before the Doctor can operate he must know where it hurts.

***You can always go to end the debt . org and click on the “Do I qualify” button in the top right corner of the page. Fill out the form online and have one of our Debt Managers do it for you!!***

• On a piece of paper list the total monthly household income.
• Underneath income list all of your creditors that you pay on a monthly basis. (If you are not sure what they are go to annuall credit report . com for a free look at your credit report which will list all of your creditors.) Next to the name of the debt enter:
• Minimum monthly payment
• Interest rate
• Account type: Is it a revolving (credit card) installment (loan with payoff date) Automobile or Mortgage debt.

Step 2: Determining Debt Ratio

• Using a calculator, add up both the balances and the Total Monthly Payments (here forth referred to as Monthly Expenses) for all the creditors on the sheet.

• Take the Monthly Expenses (ME) and divide that by the Monthly Income (MI) from step one. For example:

ME = $1750
MI = $5,000 = 35% Debt to Income Ratio (DTI)

Step 3: Determining Housing Expense Ratio

• Determining Housing expense Ratio is very similar to determining DTI. You simply add up your total monthly housing expense (MHE) (Mortgage, Rent, taxes, insurance, repairs, utilities, etc.) and divide that into your total monthly income. For example:

MHE = $1,150
MI = $5,000 = 22% Total Monthly Housing Expense


Step 4: Determining Consumer Debt Ratio (CDI)

• Keeping with the trend, determining monthly consumer debt expense ratio (MCDE) is much like solving for MHE. Add up all consumer debt (Auto, Credit Card and Personal Loans) and divide into the MI.

MCDE = 650
MI = 5000 = 13% MCDE Ratio

Step 5: Analyze the Data

Now that we are pros at solving for DTI, MHE, and MCDE, what do we do with this data? What impact does it have on my overall financial fitness? Great question! To answer this we must think of the Debt-to-Income Ratio as an onion with layers. These layers are made up of our MHE and MCDE.

Onions need to fit in the refrigerator and cannot exceed a certain size much like our DTI cannot exceed our Income Threshold. A healthy DTI can be found in the 30 – 40% range.

Exceeding the 45% is very problematic. Mortgage Lenders take this ratio into account when analyzing a borrower’s credit worthiness, keeping a threshold of 43% for most. At this point many people begin realizing how slippery of a slope it they’re on. Paychecks do not seem to go as far, credit card debt begins to rise, bills being paid at the last possible minute and stress levels are peaking.

What about MHE and MCDE? Where do they need to be?

The rule of thumb suggests remaining at or below the 33% mark. We know that the total DTI needs to stay under the 40% mark. Deductive reasoning tells us that the sum of MHE and MCDE cannot exceed 40%. As long as the consumer remains below this 40% threshold, he or she can dance responsibly and comfortably within the numbers. In other words, there is no rule of thumb when determining the MHE and MCDE. These ratios will vary from consumer to consumer depending on the consumer’s preference, needs and local market.

Step 6: ACT!

If you haven’t already, go back to step one and plug in your numbers.

***Remember: You can always go to end the debt . org and click on the “Do I qualify” button in the top right corner of the page. Fill out the form online and have one of our debt managers do it for you!!***

Once you have calculated for household DTI and you fall below the 40% barrier, put your pencil down and pat yourself on the back. You are finished.

If you are 40% or higher it is imperative to view a cross section of your ratios. We have just a little further to go.

Where Are You? DTI = 40% - 45%

Scenario: Little financial stress. No need to panic here but you do need to act. You may feel very comfortable in this range but, as stated previously, you are on a slippery slope. Even the smallest of financial incidents (car accident, short time off from work, etc) could be just enough to send you sliding down the slope.

Action: Take a look at your list of monthly creditors. Narrow that list to just credit cards. First search for a new credit card with a promotional 0% APR on balance transfers. Move balances of the higher rate cards to this and begin paying down the debt. If this is not possible, find the card with the highest rate. Make the minimum payment to all other cards. Allocate the surplus to the card with the highest rate until the card is paid off. Repeat this process until all cards are paid off. **This process will not work if you continue using the credit cards**.

Where Are You? DTI = 45% - 55%

Scenario: Not delinquent on any monthly obligations but only making minimum payments. Not enough left at the end of the month to apply to principle of revolving accounts.

Action: More than likely you will not qualify for a refinance or HELOC as a result of high DTI and the impending risk thereof. As a result, we suggest one of the following options:

• Consolidation Loan: Apply for an unsecured debt consolidation loan. Although this will typically carry a higher interest rate than a mortgage loan, it is a viable option. Make sure this loan terms are fixed and installment based (not revolving like a credit card or line of credit). There is no negative impact your credit assuming you make your payments on time.
• Third party consolidation plan: An agency consolidates your debt into one payment and attempts to lower the rates with your creditors. Typical programs range from 3 – 7 years of repayment. This will negatively impact your credit rating as the creditors will notify the credit reporting agency, and subsequently showing on your credit report, that the account terms have been negotiated and being managed by a debt management service.

Where Are You? DTI = 55% And Up

Scenario: Bills are late, or will be late soon. Collectors may be calling. Stress is high. There is simply not enough income to cover financial commitments and day to day expenses.
Action: Debt Settlement: A third party agency like Mitigation America will negotiate down the principle of the debt to roughly 40% of the original balance. Additional benefits are, but not limited to, the following:
1. As opposed to a consolidation agency that only negotiates the interest rate, debt settlement companies eliminate the interest and any late fees or penalties.
2. It is the most cost effective service of its competition. Go to end the debt . org and click on the debt calculator tab to illustrate the huge cost difference.
3. Most importantly typical repayment programs under debt settlement range between 1 – 3 years. Like consolidation companies this service will negatively impact your credit. However, because you graduate the program much sooner, you are able to rebuild your credit much sooner.

*** If you find that after working through all debt settlement scenarios and there is not enough monthly income to comfortably allocate to the program, you may want to discuss bankruptcy with a local Bankruptcy Attorney.

One of the best things to do in controlling your debt, is note your spending.

- By this I mean literally everything. Then at the end of each week you'll know exactly how much you've spent. So you can have more control over your incoming and outcoming finance.

It amazing how alot of people dont even know how much they've spent each month and all these little things eventually rack up into a big total.

Hope this helps

- Check out my youtube channel in my sig, as has some great documentarys on debt on it. You'll probably learn quite alot from them.

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