Debt is never anyone’s friend. However, there are methods of getting out of debt that are legally and morally possible for those individuals, couples or small businesses who find themselves in the “debt trap.” The “debt trap,” coined by the folks over at Nationwide Debt Reduction, is when you keep making payments to your credit cards companies, however do to the minimum amount of money you are paying, or because of the high interest rates these companies are commanding, you are getting nowhere. Therefore, we fell it is important that you understand the 3 legs of debt.
Therefore, by electing to enroll in a Debt Management Program, you are making a decision that becoming debt free is far more important to you than retaining a good record of payments to your creditors for the short term. In fact, you either are or about to start missing monthly payments to your creditors soon anyway. Most people instinctively know that they are probably going to sink deeper into debt if they continue doing what they had been doing before joining a debt relief program. What many do not know is that, despite a great payment record and a relatively high credit score, their credit rating is already starting to suffer due to something known to the credit bureaus as your debt-to-income ratio. This is where you are close or becoming close to reaching the maximums allowed by your creditors.
Creditors offering “secured” debt products rate their prospective borrowers using three main criteria. In this article, Family Financial Tips will attempt to give you a simplified overview of the “three legs of the stool” on which credit worthiness stands. The three “legs” if you were are your income, your credit and your equity.
As most people are aware, income alone is not a stand-alone consideration, however rather, “income” is rated as it relates to “outgo”. An extreme example of this would be someone with an income of one hundred thousand dollars a year, however who is committed to contractual to making debt payments that combined with other living expenses, exceeds their spendable income, say perhaps one hundred and twenty thousand dollars.
In other words, it is not the amount of income they make; it is the available, spendable portion of their income that is considered. Using formulas known as “debt to income ratios” or “debt ratios” for short, lenders will calculate a percentage by dividing the borrower’s contractual obligations by looking at a simple illustration: add the minimum required monthly payments for mortgage (or rent), car payment(s), credit card payments, student loans, and any other debt payments. Then, they divide that total by the borrower’s gross monthly income. That is the client’s debt ratio. Should your debt ratio exceed say 38% in the case of a mortgage lender or car dealership, it is going to be very difficult for you to get any loan.
Credit, is the second factor or “leg” in our example and is the result of several considerations. How has the applicant paid similar obligations or have they needed debt help? How have they paid unrelated obligations? And what is their credit score, based on the computerized formulas of the reporting bureaus? This is where many consumers are confused. They think their credit rating and record with the credit bureaus is the only thing that counts in trying to secure credit. Yes, these are important; however they are only one of the items considered.
Mortgage companies, for example, care more about how the applicant paid their last housing obligation (mortgage or rent) over the past few years. Then they will look at how they made their other secured debt payments as a secondary consideration, and finally their unsecured debt payments. The same could be said with auto lenders. How did the client handle their last car payment, then what about their mortgage, then their unsecured debt? If the application is for unsecured credit, the lender will likely give equal consideration to the record of all types of payments.
Then there is the actual credit scoring, a method of rating a borrower that is based on computer modeling. This takes many factors into consideration, and these formulas are patented by the credit bureaus. Therefore, no one can truly predict how their “credit score” is determined or how the credit bureau derived at that score. If, for example, you are living on your credit cards that pattern will eventually show up and your credit score. For more information on about credit scores, you can go to http.www.myfico.com.
Finally, equity is the third factor that determines your credit worthiness and generally applies only to secured debt. If you think about it, secured creditors are the ones who usually require a down payment when you try to purchase a house or an automobile, however not when you apply for a credit card. Equity is what a lender will demand when the borrower’s debt ratios are high (income), or when their payment record or credit score look weak (credit). A large down payment can make up for shortages in the other two categories. However when payments have been missed, or debt ratios are disproportionately high, who has the extra cash to put down?
The truth is, if it has been a struggle for you to keep up a good payment record, chances are that your credit rating is already starting to suffer. Many homeowners today could not even qualify for their existing mortgages if they had to reapply today. In that situation, it is only a matter of time until you run into a solid wall of insolvency, with no way out except by utilizing a debt settlement program such as Nationwide Debt Reduction’s. This program is designed solely to head off that possibility. These people want to get out of debt for good now. In addition, when each creditor gets paid off, it will show up on your credit score as a zero ($0.00) balanced owed for each account. That is best debt-to-income ratio you can have!
Therefore, if you feel a debt relief program can help you turn things around now while it is still relatively painless, why not give these good folks a call at 800-890-6658 for a free consultation. It may temporarily cost you that lofty credit report score, however when all is said in done (usually within three years or less) you will be completely debt free instead of sliding deeper and deeper into the quicksand of unsecured debt.