How to Assess Your Debt in 3 Easy Steps

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Written by Amber Westover | June 26th, 2019
Amber is currently a Digital Marketing Strategist at Best Company. She is passionate about learning and researching. Her interests include traveling, eating sushi, painting, and reading Agatha Christie novels.

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Ignoring your debt doesn't make it go away. If you have a large stack of bills hidden in a drawer it's time to pull it out. Assessing your financial situation is the first step in taking control of your debt. Grab a glass of wine or cup of tea and slip into your most comfortable sweats. Pull out your laptop and turn on your favorite Spotify playlist. Following these three steps, you can finally have a clear vision of your financial situation and you will take for first steps towards getting out of debt.

1. Gather Information

Grab any credit card bills, loan statements, or mortgage information lying around your house. You will also want to pull up all your online records. This includes your paychecks and other account summaries. During this process, you want to analyze both your outstanding debt and your current income. Focus on monthly payments for both income and debt to make comparisons easier.

Be sure to gather information about the following debts:

  • Auto loans
  • Student loans
  • Personal loans
  • Payday loans
  • Mortgages
  • Home equity loans
  • Credit card balances
  • Tax debts
  • Medical bills
  • Consumer debts (Financed items such as appliances or cell phones)

Also, you want to gather information about your sources of income:

  • Salary
  • Social Security
  • Disability payments
  • Rental income
  • Interest

2. Record Information and Check for Accuracy

Once you have all your current financial records, check for accuracy. Make sure your online records match your paper bills. If there are any inaccuracies now is the time to correct them. There is no reason to pay more than you owe. LegalShield recommends calling your creditor's customer service line to dispute the error. Additionally, once the problem is resolved, ask for verification of the correction in writing to prevent future problems.

Now is a great time to check your credit report. You are entitled to three free credit reports each year, one from each of the major bureaus (TransUnion, Equifax, Experian). Review your report and make sure the number of accounts and outstanding balances matches your records. If there are errors you may dispute them by sending a letter to the reporting company and the information provider. For more information read the Federal Trade Commission's article on disputing errors.

When you feel confident that your information is accurate, record all your figures in a spreadsheet. You can create your own in Excel or Google Sheets. There are also a variety of free templates available online. For example, this Debt to Income Ratio Calculator makes it easy to quickly assess your debts. OfficeTemplates.net also offer a simple downloadable template here. If you create your own sheet or use a pre-made one be sure to record all your debts and incomes. Careful check your entries for accuracy. Remember to keep all values in monthly quantities.

3. Calculate

With all your information carefully recorded you are ready to total your debts. If you are using a template it will likely perform calculations for you. If you created your own spreadsheet there are three important calculations you should make:

  • Total debt: This is the sum of all your debts. It reflects the amount of money you owe to creditors each month, knowing this number will help you make a plan to pay off your debts.
  • Total income: This is the sum of all your sources of income.
  • Debt-to-income ratio: This is calculated by dividing your total debt by your total income. To change it into a percent simply multiply the answer by 100. There are a variety of free calculators available online. Wells Fargo has a very simple one available here.

You want to keep your debt-to-income ratio low. To receive a qualified mortgage many borrowers require a 43 percent debt to income ratio; however, 36 percent is preferable. Even if you are not currently looking for a mortgage you can use these percentages as a guideline. A debt-to-income ratio below 36 percent is ideal.

If your debt-to-income is extremely high you may want to consider several debt relief options. You can try to do-it-yourself with the debt snowball or avalanche methods. If you have multiple creditors, debt consolidation may also be a great option.

Debt settlement may be a helpful option if you are unable to make payments and are continually falling further and further behind. Freedom Debt Relief and Pacific Debt are highly rated debt settlement companies on BestCompany.com.

Consider your options and find the method that works best for you. Now is a great time to get out of debt. Gathering information, recording it, checking for accuracy, and calculating your total is the first step in taking control of your financial situation.

The Top Debt Relief Companies

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#1 Freedom Debt Relief chevron_right
9.9 Overall Score
4.7
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(9,844)
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#2 Pacific Debt Inc. chevron_right
8.3 Overall Score
4.8
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(1,745)
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#3 Accredited Debt Relief chevron_right
7.7 Overall Score
4.9
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(1,148)

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