Can I Get out of Debt on My Own?
The Debt-To-Income Ratio
Your debt-to-income ratio is the total amount of debt you pay every month (mortgage, car loan, credit cards, etc) divided by your monthly income. For example, if you’re monthly income is $4000 you’re debts are $350/month for an auto loan + $1100/month for a mortgage + $200/month for credit cards ($1650 total), your debt-to-income ratio is 36% ($1650/$4500). The debt-to-income ratio is a good way to determine your own financial security.
What is a good debt-to-income ratio?
Anything above a 20% debt-to-income ratio is in the danger zone, and should probably be handled by a debt management program. In the danger zone, it is best to talk with credit counselors to see what the best options are in handling the debt.
A 15-20% debt-to-income ratio is in the caution zone. In this case, one could definitely try and handle the debt on their own. Many people in this category try debt self-help, but may be starting to struggle. With this debt-to-income ratio, especially for those closer to the 20%, it might be wise to seek out a debt management program.
Anything under 15% is a good debt-to-income ratio, and can mostly likely be handled by oneself. With this debt-to-income ratio, people can usually still comfortably pay for essentials like food, and housing.
A high debt-to-income ratio can actually inhibit people financially. In a lot of cases, 43% is the highest debt-to-income ratio accepted to qualify for a mortgage.
Tips To Get Out Of Debt
1. Be Aware
Know your debts entirely. It is important to be aware of every bill, how much income is coming in, and how everything is fitting together. How much generated income can be allocated to paying down the bills and debts? Seeing all of the debt laid out, and really understanding each financial amount can have a huge behavioral difference on how much one chooses to allocate to their debt payments.
It’s also helpful to make a list of financial goals one wants to accomplish, and how they plan to get there. A game plan and monthly (or weekly) budget can perpetuate frugality.
2. Hide The Credit Card
Put away the credit card, and try to pay for items with cash or debit. This will eliminate the temptation to accrue more debt, and will help one think more about the money they currently have in their account. When shopping, it is best to truly make conscious decisions.
3. Call Your Creditors
If monthly payments are getting harder and harder to make, try calling creditors to negotiate lower interest rates. They may be able to help, or at least lower the monthly payment.
4. Start An Emergency Fund
Every so often, set aside a little money for an emergency fund. That way, in case an unexpected life event happens, one won’t have to dip any farther into debt.
5. Try The Snowball Method
Tackle the biggest debts with the highest interest rates first, and then work down to decrease the size of the debt snowball. Create a list of the smallest to biggest debts owed, and work down the list. Write out each debt’s monthly payment, and create a plan. With the snowball method, it is recommended that one allocate their extra income to decreasing the size of their debt snowball.
How Much Debt Can I Handle?
On average, people turn to debt management companies for help with around $19,000 worth of debt. However, some don’t want to try and get out of debt themselves, and turn to debt management programs with as little as $1,000 in debt. Some wait until they are $100,000 or more in debt. It really depends on the person, their income, and their own unique circumstances. So when is debt too much to handle? Though this depends on income and a variety of factors, it is a good time to seek professional help when:
- It is getting difficult to make monthly payments
- One feels like they are drowning in high interest rates
- There are multiple credit debts and payments every month
- The debt feels overwhelming and excessive
We surveyed over 100 people on our site and asked them if they had ever tried to get out of debt on their own. The most popular answer (62%) was that yes they had tried, but they couldn’t do it alone. This was followed by 23% never trying to get out of debt on their own, and 15% of people succeeding at getting out of debt alone.
Even though it is possible to handle debt without a professional, it is best to seek a debt management program when the debt feels overwhelming and never-ending. Debt programs can help determine the smartest, fastest, and most affordable ways to escape debt.