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Consumer credit counseling is where you choose an agency or company where you will be assigned a debt counselor. This person will analyze all of your spending and your income. He or she will help you develop a budget if you don't already have one and what's called a debt management plan or DMP. Your counselor will contact your creditors and negotiate reductions in your interest rates. He or she will present your DMP to your creditors for approval. Assuming that they all approve it you won’t pay them any longer. You will send the credit counseling company or agency one check a month and it will distribute the required funds to your lenders. The payment you send to the credit counseling company or agency should be a lot less than the sum total of the monthly payments you've been making on those debts. So again, this would help with your debt-to-income ratio.
Borrow from your life insurance
Do you have what's called whole life insurance? This is the type that has both an insurance and an investment component so that it builds up cash value over a period of time. If you have this type of policy, you should be able to borrow from it. The really good news is that you can pay back the money whenever you like or not pay it back at all.
Tap your retirement fund
If you don't have a whole life insurance policy, you may be able to borrow from your retirement fund. If you have a 401(k), you should be able to borrow up to $50,000 or half or what’s in your fund, whichever is less. Unlike a life insurance policy, you would have to pay back this money and within five years. And you would have to pay interest on the loan but here’s the good part, you’d be paying interest to yourself. If you had $30,000 in credit card payments and use money from a life insurance policy or your retirement fund to pay it off, your monthly debts would be reduced substantially, which should help your debt-to-income ratio considerably. If you’d like more information about borrowing from a 401(k), here’s a short video you could watch.
Because it's as important as your credit score
It really is important that you know your debt-to-income ratio and that if it's too high, you do something about this. It's not only a quick way to understand how you stand financially but it can play a key role when you apply for a loan such as a mortgage, a auto loan or a student loan.