Most people have some debt. Debt is when you owe money to someone, such as a lender or creditor, because you want to have or use something now and pay for it later. In return, you pay the lender or creditor extra money called interest. Debt isn't a problem if you can repay it. But many people have financial problems or stuff going on in their lives that cause them to go deeper into debt than they can handle. They've dug themselves a hole.

How much debt is too much depends on how much money you make (income) and how much money it costs you to live (expenses). Experts say that you should spend no more than 20% of your take-home pay (after taxes) to repay debts to creditors, excluding your house payment. For example, if your paychecks add up to $1000 per month, you should spend no more than $200 per month to pay off loans, car payments, credit card bills, etc.

But you may decide that less debt than that is too much. If you're unable to do the things you want because you're still paying off old bills or can't meet your basic living expenses, it may be time for you to develop a plan to reduce your debts.

Click on the link below to use a calculator to see how much of your income is being used to repay your debts to creditors. Do not include mortgage or rent payments.

Debt-to-income ratio calculator, click here.

Do You Have a Problem With Debt?

• Are you using credit more often?
• Do you borrow money to pay current bills?
• Are you regularly late at paying bills?
• Do you have to choose which bills to pay now and which to put off until later?
• Do you often pay only the minimum amount due on your credit cards?
• Have your living expenses remained the same, but your savings balances gone down and your credit card balances gone up?
• Are you being contacted by creditors for payments?
• Have you just given up on some bills?

If you answered yes to many of these questions, it's probably time to take action now.

No New Debt: Start by not taking on any new debts. Don't get any loans, and don't charge anything on your credit cards until your get control over your finances.

Get free help: There is free help available from nonprofit credit counseling agencies. They will help you make a plan to regain control over your finances and repay your debts. Who do I talk to?

Lower Your Debt First: Make lowering your debts a priority. When you find ways to reduce your spending, use the extra money to repay your debts. By making more than minimum payments, you not only can pay off your debts sooner but you can also save money in the amount of interest that you pay for borrowing the money.

If you are unable to make your minimum payments on time or in full, contact your creditors immediately. The sooner you call, the more likely a creditor will be to work out a payment schedule you can meet. Most creditors will try to help you if they can.

If you need help in dealing with your debts, you may want to contact a Consumer Credit Counseling Service (CCCS). This is a nonprofit organization with more than 850 offices located in 50 states. CCCS counselors will try to arrange a repayment plan that is acceptable to you and your creditors. They will also help you set up a realistic budget and plan future expenses. These services are offered at little or no charge to you. You can find the CCCS office nearest you by checking the White Pages of your telephone directory or by calling from a touch-tone phone 1-800-388-2227 to get the telephone number. However, if you have other questions, contact:

National Foundation for Consumer Credit, Inc.
8611 Second Avenue, Suite 100
Silver Spring, Maryland 20910
(301) 589-5600

or you can go the following web site:

http://www.debtadvice.org/takethefirststep/locator.html

In addition, nonprofit counseling programs are sometimes operated by universities, military bases, credit unions, and housing authorities. They are likely to charge little or nothing for their assistance. Or, you can check with your local bank or consumer protection office to see if it has a listing of honest, low-cost financial counseling services.

If you do not repay your debt on time, you can up end paying more for it with late fees and interest or finance charges. Paying late also messes up your credit rating. Then, credit may be harder to get in the future, or it may cost more to get it. If you miss a payment to repay your debt, you could lose your line of credit or your possessions. For example, if you miss some car payments, the creditor has the right to take your car if you can't pay for the total amount that you owe. Financial problems can also force you to file for bankruptcy, which seriously damages your credit rating for a long time.

You are allowed by law to correct any errors that appear in your Credit Bureau file. If a creditor rejects your application because of negative information in your Credit Bureau report, it must identify the Credit Bureau involved. At your request, the Credit Bureau must disclose the contents of your credit file. If you act within 30 days of being turned down, there is no charge for this service.

Check to see whether the information in your credit report is accurate and complete. You have the fight, under the Fair Credit Reporting Act, to dispute the completeness or accuracy of any information in your report. When you do so, it helps to tell the Credit Bureau, in writing, why you think the information is wrong. Unless your dispute is silly or irrelevant, the Credit Bureau then must reinvestigate the matter. The Credit Bureau must correct any information that it finds is not reported accurately. Information that cannot be verified must be deleted. If you disagree with the results of the Credit Bureau's reinvestigation, you may file a brief dispute statement explaining your side of the story. At your request, the Credit Bureau will note your dispute in future Credit Bureau reports.

Be aware that when negative information in your report is accurate, only time can assure its removal. Credit bureaus are permitted by law to report bankruptcies for 10 years and other negative information for 7 years. There is nothing that you (not even a professional) can do to require a Credit Bureau to remove accurate information from your credit file until the reporting period has expired. Don't be misled by ads aimed at people with bad credit histories, judgments, or bankruptcies. Promises to "repair" or "clean up" a bad credit history are completely exaggerated.

However, please note that studies prove that up to a quarter of all credit reports contain errors. You have the right to dispute any misinformation on your credit report. You should begin the dispute process by contacting the creditor responsible for the inaccuracy. Many times people feel they're time is better spentÊhiring a professional attend to this process. Make sure you select a reputable firm.

A sudden illness or the loss of your job may make it so that you cannot pay your bills on time. Whatever your situation, if you find that you cannot make your payments, contact your creditors right away. Try to work out a new payment plan with your creditors that cuts down your payments to a more manageable level. If you have paid on time in the past, they may be willing to work with you. Do not wait until your account is turned over to a debt collector. At that point, the creditor has given up.

Automobile loans present special problems. Most automobile financing agreements permit your creditor to repossess your car any time that you are in default on your payments. No advance notice is required. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to deal with the added costs of repossession.

If you are having trouble paying your bills, you may feel the urge to turn to a company that claims to be able to solve all your debt problems. Such businesses may offer debt consolidation loans, debt counseling, or debt reorganization plans that are "guaranteed" to stop creditors' collection efforts. Before making any commitments, investigate it thoroughly. Be sure you understand what services the business provides and what they will cost you. Do not rely on verbal promises that do not appear in your contract. Also, check with the Better Business Bureau and your local consumer protection office. They should be able to tell you whether other consumers have registered complaints about the business.

Consumers who turn to businesses like these for help, sometimes encounter additional problems. For example, debt consolidation or other large short-term loans may have high hidden costs and may require your home as collateral. A dishonest company may fudge the terms of such loan agreements; if so, you could end up losing your home.

Businesses offering debt counseling or reorganization may charge substantial fees or a percentage of your debts, but fail to follow through on the services they sold you. Some may do little more than refer indebted consumers to a bankruptcy lawyer, who charges an additional fee. Businesses advertising voluntary debt reorganization plans or "Chapter 13" relief may fail to explain that Chapter 13 debt adjustment actually is a form of bankruptcy. To qualify for it, you must have a source of regular income and a plan for repaying your creditors that meets the approval of the bankruptcy court. Businesses that sell bankruptcy-related services may not tell you all that is involved or assist you through what can be a complex and lengthy legal process. Debt problems can be distressing, but be careful when selecting a solution. Some "solutions" may only add to your problems.

If you need help in dealing with your debts, you may want to contact a Consumer Credit Counseling Service (CCCS). This is a nonprofit organization with more than 850 offices located in 50 states. CCCS counselors will try to arrange a repayment plan that is acceptable to you and your creditors. They will also help you set up a realistic budget and plan future expenses. These services are offered at little or no charge to you. You can find the CCCS office nearest you by checking the White Pages of your telephone directory or by calling from a touch-tone phone 1-800-388-2227 to get the telephone number. However, if you have other questions, contact:

National Foundation for Consumer Credit, Inc.
8611 Second Avenue, Suite 100
Silver Spring, Maryland 20910
(301) 589-5600

In addition, nonprofit counseling programs are sometimes operated by universities, military bases, credit unions, and housing authorities. They are likely to charge little or nothing for their assistance. Or, you can check with your local bank or consumer protection office to see if it has a listing of honest, low-cost financial counseling services.

The Federal Trade Commission enforces a number of federal laws involving consumer credit, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Fair Credit Billing Act, and the Fair Debt Collection Practices Act. It also provides free brochures explaining these laws. For these or related publications, such as Building a Better Credit Record, Women and Credit Histories, and Credit Billing Blues, write to:

Public Reference, Federal Trade Commission
Washington, DC 20580

Although the Commission cannot solve individual problems for consumers, it can act when it sees a pattern of possible law violations develop. If you have a complaint that may involve a violation of consumer protection law, write to:

Correspondence Branch, Federal Trade Commission
Washington, DC 20580

 

^ back to top