High Credit Ratio
Most people these days have some kind of outflow of finances per month towards loans, mortgages, or even credit cards. This is common trend and is known as debt. Debt is not necessarily a bad word and if handled well, can actually help you manage your finances better. But, if the outflow of finances toward your loans is too much per month; they can eat into your savings and stint your financial growth completely.
You can find out if you are in healthy debt by simply calculating your debt to credit ratio. If your calculations show that less than 30% of your income goes directly to pay off your debts then you are in the safe zone. Continue in this manner and you will progress financial without any stress. However if this number is above 30% then you must cut down on your debt immediately or risk a financial crisis.
High debt to credit ratios can hamper many factors in your financial progress. This affects you borrowing power in more ways than you realize.
Firstly, your debt to credit ratio is an important factor which determines your FICO score. When you apply for a loan with a bank or a institute of finance they can calculate your credit easily from all the information you provide during the application process. This is how they easily predict your financial future and how close you are to any financial trouble. If your debt to credit ratio is too high, they will simply reject your loan. Also the nearer you are to the borderline, lenders quote higher interest rates.
If you have a sudden emergency and have an unexpected expenditure in a month, then you will not be able to make your payments on time. This is because along with your debt and your monthly expenditure, you are cutting it too close and depending too much on income.
The best option for you is to tackle current debt and find out the best ways to cut it down. Figure out what loans you can pay off immediately instead of paying interest every month. This will save you a lot of money in the long run. Look at which creditors you are paying high interest rates to and make it a priority to pay them off at the earliest opportunity.
Changes in your lifestyle can also assist in bringing down your monthly expenditure. Once your debt to credit ratio is below 30%, you will find yourself at ease and able to make savings each month.