When To Pay Down Your Debts
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Filed under: Debt
Debt isn’t necessarily a bad thing. In fact, holding debt under certain limits can be highly beneficial to your credit score. However, having too much debt, too many accounts or delinquent accounts can be detrimental. So how do you know when enough is too much?
Crossing The Line
The general rule of thumb is to have at least one secured line of credit, such as a mortgage or car loan, and up to three unsecured lines of credit. As long as you are able to make payments each month and haven’t missed a payment you are doing well with your debts. Ideally, you should be paying more than the minimum payments on your accounts each month. When you find that you cannot afford to pay more than the minimum payment, you should begin to take a closer look at your finances.
When evaluating your debt loads on unsecured accounts look for two things: (1) your debt-to-limit ratio and debt-to-income ratio. The debt-to-limit ratio is the amount of total debt balance divided by the maximum credit limit on the account. The ideal number is around 30 percent, anything more than this should be considered for debt reduction. The debt-to-income ratio is the amount of debt across all accounts divided by gross monthly income. This number should stay less than 40 percent to remain in good financial standing.
If your accounts are in good standing and your debt ratios are below 40 percent, congratulations! If they aren’t, don’t feel bad. Less than half of Americans fit this category and the majority of us are working to lower our debts. Luckily, credit negotiations and debt management plans are two effective options we have for getting out of debt and back on track to financial health.