While having debt is not necessarily a bad thing especially if you are investing in your education, having too much can lead to your financial undoing. A good gauge of whether you’re in over your head is to take a few minutes to calculate something called your debt to income ratio. In the numerator, include all you monthly debt payments (e.g. credit cards, student loans, car loans). In the denominator, put your monthly take home pay (after taxes) and then divide. The result will yield a percentage which means:

10% or less - you're in pretty good shape
20% or more – you’re on shaky ground
30% or more – you’ve gone too far – no more credit for you

Here’s an example:

Following these steps will help do it in less time:

1. First remember that if you really want to get out of debt you have to do two important things:
   1. Pay more than the minimum payment on your credit cards and other debt
   2. Stop adding to your debt—use your credit cards only for emergencies
      
      
2. Figure out your monthly income and expenses including the minimum payments required on all your debt. If you’re graduating, you'll be expected to begin making student loan payments too. This will allow you to see how much money you may have left over to pay more than the minimum payments. If you can't make the minimum payments, you may want to seek some additional help from a professional Financial Counselor.
   
   
3. Always pay at least the minimum on all of your debt each month. Missing or being late with any payment can negatively affect your credit score. Not to mention, a poor credit score will make it harder for you to rent an apartment, buy a car or take out a loan in the future.
   
   
4. Plan to use any extra money you have to pay off your debt.
   
   
5. There are at least two approaches to debt elimination. Most financial experts recommend paying off whichever debt has the highest interest rate first. This is called the High Interest method, since it saves you the most on interest costs. Another alternative is the Snowball method, where you ignore the highest interest rate loan and pay off the smallest (dollar amount) debt first. The idea is to give you some psychological "successes" by paying off at least one loan. This method will cost you more in the long run, so think carefully before choosing this road. Click here to find a really cool calculator that shows you how long it will take you to pay down your debt under various payment levels using either method.
   
   
6. Negotiate for lower interest rates. While this is not an option for student loans—some lenders including credit card companies are willing to lower interest rates.
   
   
7. Remember - keep your debt in check and only purchase what you really need.

Check Out the Federal Income-Based Repayment Option:

If you're graduating or planning to leave school soon, check out the new federal Income-Based Repayment Option. Created to reduce financial hardships for students, it can cap monthly loan payments for most federal loans to an amount that is considered affordable based on your income and family size. It doesn't apply to loans taken out by your parents (e.g. PLUS loans) or to any other private or supplemental loans.

In addition, there is a new Public Service Loan Forgiveness program for federal loan borrowers who work in certain kinds of jobs like teaching. It will forgive remaining debt after 10 years of eligible employment and qualifying loan payments.

Want to know more? Click here.

Road to Recovery

Getting free of debt doesn't have to take a lifetime. Paying your debt down and making your payments on time will demonstrate that you are financially responsible. These good behaviors will be reflected in a stronger credit history and credit score. With a little planning and a bit of discipline and patience, you'll be on your way to becoming a financial maestro!

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