What is the best way to avoid financial difficulties? Prevention; we can never repeat it enough. Unfortunately, few people saw the problem coming before finding themselves with their backs up against the wall. Here are a few tips to protect yourself.
Maintain a low debt level
Usually, people worry a lot about their credit score, which reflects their repayment habits (within 30 days, 60 days, etc.) and, with great difficulty, they make the minimum payments on their debts. On the other hand, they pay little attention to their debt level.
However, the day they try to apply for a line of credit or personal loan, they will be denied by the financial institution because their debt level is too high.
A healthy financial situation therefore depends on a low debt level. Keep an eye on yours! By calculating your debt ratio, you will be able to tell if your debt level is low, normal or high.
How to calculate your debt level?
Nothing could be easier: simply visit debt ratio tool and follow the guide! The sooner the debt problem is identified, the more quickly you will be able to get out of it with the least possible drawbacks. This is the best thing you can do for yourself.
Note that if you wish to get a consolidation loan (i.e. grouping all of your debts into one single loan), the calculation of your debt ratio will be based on the monthly payment of the consolidation loan, not on the debts that you want to consolidate. Thus, in the “Loans” section of the calculator, you must indicate the monthly payment of your future consolidation loan (see the Loan Payment Calculator tool to evaluate it).
The financial institution generally considers the results as follows:
30% and less: Excellent
31% to 36%: Good
37% to 40%: At risk
40% or more: Problematic
With a result of over 40%, unless special circumstances apply, a financial institution will most likely deny your loan request. A ratio that is close to or above 40% is a red flag, because your financial institution will not permit you to realize your future plans if they involve financing (such as the purchase of a house or cottage) or deal with an unforeseen event resulting in a major urgent expense.
Financial health is not summed up in a specific point in time; you must redo this calculation every year. You will then see if you’re on the right track or if your situation requires adjusting.
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What is a debt ratio?
It is a tool used by banks to determine if you are able to repay a loan that you would like to obtain.