Michael Shotnik, Colorado Mortgage
When pursuing a home loan, one crucial financial component a lender looks at is your ability to pay back a loan; your debt-to-income ratio.
Most people at one time or another find themselves under a pile of debt for various reasons.
The key is to formulate a strategic plan to get out of debt instead of continually making the minimum payments.
Gradually increasing your debt repayment will also factor positively into your FICO score.
I recommend a strategy Lifehacker calls “The Stack Method.”
Here is a blueprint of this effective method:
• Hide the credit cards, cease spending and be realistic. Learning to live within your means is a challenge, and the temptation to make unnecessary purchases is too great with your cards readily available. Hide them and draw the line between want and need.
• Prioritize your debt payments by interest rate. High interest rates are your biggest enemy in paying off debt. Often we’re unaware of how much the interest rate increases the amount we have to pay back. Analyze each card’s rates and plan to pay off the highest first.
• Try to lower interest rates with other banks. It’s possible to do a balance transfer to secure a lower interest rate, but be fully informed of all the terms and fine print involved. If one card’s rate is lowered, then you can reorder the card repayment priorities.
• Develop a practical and tactical budget. Write down all your monthly expenses, including debt minimum payments, and prioritize those expenditures by importance. At the top, write down your income after tax. Be sure to live within your means! Make some hard choices about excessive spending. Don’t forget to factor in the cost for emergencies and the occasional fun outing. The “stack” strategy comes into play when you create an extra amount you can commit to for debt repayment. What frivolous expense for 40$ can go toward debt? Can you dig deeper for 60 / 80 / 100$?
• The repayment plan! First, always cover all your minimum payments, because extra fees obviously work against this plan. Your top prioritized debt with the highest interest rate will now be paid with the extra amount set aside from the budget you created. As this continues, your minimum payment will drop, and continued payment with the stacked monthly budget gets it paid off faster.
• Track your progress and congratulate yourself. Perhaps you’re better at managing your money and can adjust payments to make faster progress? It doesn’t have to cost money to celebrate your improvement, but if you treat yourself, stay within that budget!
• Be fruitful and multiply. Before long, that first debt will be paid off and you can move onto the next highest interest rate using the previous stack amount, speeding along to the finish line of being debt free! Congratulations! You deserve a celebration for that first milestone. As the debt decreases, you free up more to repay even faster.
• Keep calm and budget on. Life happens and financial emergencies arise. It’s natural to feel like giving up. You may fall off the wagon but forgive yourself and keep at it!
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