Struggling to stay on top of your debts can be really stressful. It might be tempting to bury your head in the sand and hide all those red bills in a drawer, but the first step to taking control of your debts is to sit down and work out exactly how much you owe.
To get started, make a list of everything you owe, including any loans, mortgages, credit cards, unpaid bills and overdrafts. Jot down how much you owe against each of these, how much you are currently repaying each month, any interest rates that are being applied to your debt and the dates payments need to be made. This should give you a good overview of what you owe and when.
You can then compare this against your monthly income to see whether you have enough money to cover your debts each month. A lot of lenders use a calculation called the ‘debt-to-income ratio’, which is a simple sum you can use to work out whether your debt is something you can manage by yourself or whether you might need to get help to work out a payment plan.
You can work out your own debt-to-income ratio by dividing your total monthly debt payments by your total monthly income and then multiplying it by 100. This will give you a percentage score, which you can use to help determine your debt payment strategy.
Generally, the lower the score the better, with the healthiest range falling between 0% and 40%. If your score creeps up towards 50% you might be facing possible financial trouble, so you might want to consider paying the maximum debt payments you can afford to try and reduce your ratio. If your score is over 50%, more than half of your monthly income is being spent on debt payment, which could mean you are in financial danger. If this is the case, you should try to pay the maximum debt payments you can afford and you should seek professional advice.
John has a monthly income of £1,900 (after tax) and is working out his debt-to-income ratio so makes a list of all of his debts:
Mortgage£670Credit card minimum payment£25Car finance payment£400Total£1,095
John then calculates his debt-to-income ratio:
£1,095 / £1,900 = 57 x 100 = 57%
His score of 57% means he is in financial danger and should seek professional advice on the best way to reduce his debts.