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How Can You Manage Your Debt?

Understanding how much debt you can handle and being smart about managing it can help you pursue long-term financial goals. Consider the following tips when analyzing how much you owe.

1. Calculate how much debt you carry. Although there are exceptions for special situations, many mortgage providers consider the most attractive candidates to be those with a total debt-to-income ratio of 36% or less, and a mortgage payment that does not exceed 25% of gross monthly income. If your debt thresholds exceed these percentages, you could have difficulty repaying existing debt while you invest for retirement or other long-term goals.

2. Investigate refinancing options. With rates on fixed-rate mortgages averaging around 5%, you may want to consider refinancing an existing mortgage. You’ll really have to crunch some numbers to determine if you can lower your monthly payment by a significant margin. Don’t forget to factor in closing costs and to think about how long you plan to stay in your home. If you’re planning a move within five to ten years, you may not recoup the cost of refinancing.

3. Know your credit score. The best deals on credit go to the applicants with the highest credit scores. To check yours, request a free report annually at www.AnnualCreditReport.com. Tips for maintaining a good credit score include paying your accounts on time, keeping balances low, being conservative in the amount of credit you use at any given time, maintaining older accounts, and maintaining a diversified credit mix.

4. Search for lower credit card rates. Pay attention to mailings from credit card companies where you have accounts. Because of rising delinquencies attributed to the recession and new laws that take effect in February 2010, many banks are raising interest rates, reducing credit lines, and imposing higher fees, even on borrowers with good payment histories. If this has happened to you, you can try shopping for better terms, but some observers believe that banks are likely to tighten access to credit going forward — leaving many consumers with fewer options than they had in the past. Paying more than the minimum payment due each month can really help reduce interest costs over time.

5. Start an emergency fund. You never know where or when an emergency will happen, but you can take steps to prepare. Setting aside a little every month — and having the discipline to not tap into that money unless it is absolutely necessary — will go a long way toward helping make situations less stressful when the unforeseen happens.

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