Debt

Debt load is a term that is used to describe a consumer's amount of debt. It is often used to understand if you are carrying a “safe” amount of credit. Creditors look at a debt/income ratio, comparing your income with your outgo to analyze whether you have too much debt. The debt/income ratio is figured monthly and reveals either how good, or bad, your financial picture is on a day-to-day basis.

Disclaimer: The material provided below in this section should be used for informational purposes only, and in no way should it be relied upon for financial advice. Also, note that such material is not updated regularly and some of the information may not, therefore, be current. Please be sure to consult your own financial advisor when making decisions regarding your financial management.

Please visit the Practical Money Skills site to learn more about Debt.

Borrowing strategies

When you think about borrowing money, there are several things to consider. Ideally, you should be able to:

• Identify a variety of sources and institutions which lend money.
• Evaluate the terms of the loan.
• Know how to calculate the cost of credit.
• Determine your own debt limit.

Where can I borrow?

Most consumer credit comes from: banks, savings and loan institutions, credit unions, finance companies, and credit card companies. In addition, many people borrow from relatives or other individuals who may or may not be good credit sources. Individuals who loan money but don't have a permanent place of business may offer you loans that charge more than the legal interest rate. Wherever you borrow, be sure to get a signed contract, and read the fine print including the terms and the finance charge calculations.

The costs of borrowing

Credit costs money! The cost of credit may vary considerably depending on the method used to calculate the balance on which you pay a finance charge. It is often difficult to figure out the finance charges once you start using a credit card regularly and carry a balance on it. You should try to pay off your credit cards each month. If you can't afford to pay off your credit cards each month, try to make the largest payment you can afford, and pay the card off before you make another purchase.

The four methods generally used for calculating finance charges are:

• Adjusted balance takes the amount you owed at the beginning of the billing period and subtracts any credits and any payments you made during the period. New purchases are not counted.
• Average daily balance (one of the most common methods) adds your balances for each day in the billing period and divides that total by the number of days in the period. Additionally, payments and credits made during the period are subtracted and new purchases may or may not be included.
• Two-cycle average daily balance uses the average daily balances for two billing periods to calculate the finance charge. Payments and credits will be accounted for and new purchases may or may not be included.
• Previous balance bases the finance charge on the amount owed at the end of the previous billing period.

Reducing your debt load

There are two great ways to change your debt load and debt/income ratio:
Cut spending and make more money.

Cutting spending can be the fastest way to reduce the debt load, unless additional work and income is readily available. Some have equated cutting spending with surgery for your money management. But as you heal with better financial health, you'll probably also notice that your attitude, relations with others, emotions, and sense of humor start to get better, too.

• Recognize that you don't have to continue to add to your debt load with additional purchases. Remember, you may have found a terrific bargain on a stereo, but if you don't pay it off for three years, the money you “saved” won't matter.
• Avoid “impulse purchases.” You'll be surprised at what a difference this can make.
• Learn to cook or take your lunch to work. The cost of lunch out for a week compared to a week of lunches bought at the grocery store should quickly show you how fast you can reduce your debt load by taking small steps now. A little bit every day is a great start on your financial fitness program.

Think about ways to make additional money — either an extra part-time job or a better-paying primary job. There is more than one way to change your debt load!