Debt in America keeps rising. What is the national debt of the US government? It passed $21 trillion for the first time ever in 2018. Not to mention, the total consumer credit card debt of Americans has reached about $927 billion in 2018, which is an increase of 5% over 2017’s total.
The average American debt amount for each household that carries debt is $134,058, which includes their mortgage. If a household carries credit card debt, their total credit card balance is $15,482, on average. Households with credit card debt pay hundreds of dollars per year in credit card interest payments alone.
Many households with credit card debt report that they got into debt because of unnecessary spending. However, many Americans use credit cards to pay for medical bills and other expenses that are rising faster than income. About 27 million citizens may be paying for medical expenses with credit cards.
Americans are also indebted through the following:
- College student loan debt, which has a median figure of $49,000
- Mortgage debt, which has an average of $173,000
- Auto loans, with an average of more than $30,000
- Personal loans and other debt, with an average of more than $10,000 per household
What Is Debt-to-Income Ratio and Why Does It Matter to Veterans?
Have you wondered how to get out of debt? An important number for veterans to understand and improve is their debt-to-income ratio. It’s crucial when you apply for a VA loan. The good news is you can improve your debt-to-income ratio.
What is debt-to-income ratio? It’s a percentage that compares the amount of your monthly debt payments to your monthly income. The higher your debt payments compared to your income, the higher your debt-to-income ratio will be.
For example, let’s imagine your mortgage payment is $1,000 per month and your other debt payments, including credit cards, add up to an additional $300 per month. Your total debt payments would be $1,300 per month. If your income were $3,500 per month, then your debt-to-income ratio would be 37%, which means your debt payments take up 37% of your monthly income.
What is a good debt ratio? If your debt-to-income ratio is higher than 41%, that can disqualify you from taking out a VA loan, although you can work with your lender to get an exception—if you have a good reason.
Besides affecting your ability to get a mortgage, your debt-to-income ratio tells you how difficult your financial situation is. If that number is high, you may feel like all your extra money goes to paying for debts. Lowering your ratio will make it easier to weather unexpected expenses. The further below 41% your ratio is, the safer you’ll be.
Make a Plan to Improve Your Debt-to-Income Ratio
To improve your debt-to-income ratio, it’s important to make a plan to either decrease your debts or increase your income. Many veterans focus on paying off credit card debt. Then, they only use credit cards to help pay for large expenses more safely, spreading payments over a few months. For many large purchases, though, it’s better to use lower-interest debt, such as an auto loan.
As you know, a high-interest rate on any debt can cause you to pay much more during repayment. It’s recommended that you prioritize paying off debts with the highest interest rates. Credit cards add a finance charge you have to pay every month that you carry a balance. That slows down their repayment.
You could look for ways to save money in other areas to free up cash you could use for debt payments. For example, look for better rates on auto, home, and health insurance. Switching to a higher deductible can lower your monthly payments.
You can also search for unused portions of your insurance plans and cancel those portions. You also may be able to lower your homeowner’s insurance payments by installing a monitored home security alarm.
A Special Opportunity for Veterans to Consolidate Debt
For many homeowners, monthly mortgage payments alone can add up to somewhere between 25% and 40% of their monthly income. Another great way to lower your debt-to-income ratio is with a refinance loan that lowers the amount you pay on your mortgage.
You can also lower your total monthly debt payments using a VA debt consolidation loan. Debt consolidation for veterans is a great option because VA loans have a low-interest rate. You can pull cash out of your home to pay off high-interest debt, such as credit cards, which can lower your monthly interest payments.
Would you like to use your home equity to pay off higher-interest debts? Learn more about a VA Debt Consolidation Loan on Low VA Rates’ refinance web page.