The freewheeling credit abuse days of the early 2000s are now long behind us. But it’s still pretty easy to run up debt in America, especially if you’re part of the military community. Here are five tactics to help you avoid being on the wrong side of the statistics.
Understand your debt-to-income ratios.
It's hard to know if you're doing a good job managing your debt, if you could do better, or if you could do a lot better. To get an idea, determine your debt-to-income ratios for consumer debts (auto loans, student loans, credit cards, etc.), housing debt, and total debt.
- Consumer DTI is found by dividing your monthly debt payments (except housing) by your monthly post-tax income. Goal: Less than 20%.
- Housing DTI is found by dividing your monthly housing payment by your monthly pre-tax income. Goal: Less than 28%.
- Total DTI is found by dividing all your debt payments by your pre-tax income. Goal: Less than 36%.
Try out this basic DTI worksheet to get started. Don’t feel compelled to incur debt up to these levels. Debt is definitely a case where less is more.
Tweak your financial habits.
If you’ve already fallen in the high-interest debt trap, here are some steps you can take to find a way out:
- Pay bills on time to avoid late fees and high interest charges.
- Use a debit card instead of a credit card to make sure you are spending money you have.
- Free up money each month by finding ways to reduce your expenses.
- Start building a small emergency fund; $1,000 is often a good target.
- Once you've got your emergency fund in place, start paying extra on your debts.
- Focus on your highest interest rate debt first.
- Consider consolidating your debts to a lower interest rate, but only if you’ve made the changes necessary to be confident you won’t just run up the other debts again.
Seek help from experts.
It can be reassuring to know that if you ever find (or have already found) yourself in too deep, there's help. Take advantage of free and low-cost credit advice. Your installation’s family support center likely offers free credit counseling. The National Foundation for Credit Counseling also offers excellent nonprofit credit counseling programs.
Personal financial counselors can help you establish a spending plan that includes restructuring your spending, and developing a plan to get you out of debt. Seeking out counseling may even increase your options for paying off your debt. So, while you may be down, you're never out. There's always good help nearby if you’re willing to put in the effort.
Don’t rush toward bankruptcy.
While occasionally filing for bankruptcy may be the only way out, don't use it as the easy way out. Bankruptcy can remain on your credit report for up to 10 years, preventing you from purchasing a home or vehicle, renting an apartment, getting new credit, or even being offered certain employment opportunities. It can also be problematic for security clearances.
Think hard before you take on new debt.
As you try to reduce your debt, it is obvious that new debt isn’t something you jump into blindly. No matter how compelling the reasons make sure you consider all the variables by analyzing what I like to call the RIFF — repayment terms, interest expense, future income, future situation — before you act.