What Is Recurring Debt?
A recurring debt is the requirement to make a payment for a loan or other obligation on a continuing basis. The debtor cannot easily cancel recurring debt. Some familiar examples include credit card debt, mortgages, car loans, alimony and child support.
Recurring Debt Is Different
Recurring debt is unlike other obligations to pay money in that the payments must continue until the obligation is extinguished, such as by paying off a loan or by the remarriage of an alimony-receiving ex-spouse. Contrast this with, for example, a magazine subscription, which you can choose not to renew and cancel at any time. Simply selling a financed property is not sufficient to remove a recurring debt. For example, if you sell a financed car, you still must make the monthly loan repayments until you pay off the remaining balance, which you typically do with the sale proceeds.
Recurring debt plays a significant role in your access to credit and loans. When potential lenders perform a credit check, they include your recurring debt when calculating your debt-to-income ratio. If the ratio is too high -- you have too much debt for the income you earn -- the lender may deny you credit. For example, the Federal Housing Administration only insures mortgages that meet its required debt-to-income ratios, and without such insurance, a bank might not offer you a mortgage. The FHA requires that total mortgage payments don't exceed 31 percent of your gross income and that total monthly recurring debt doesn't exceed 43 percent of your gross income.
Consequences of Not Paying
The consequences for not paying recurring debt vary, but none are good. For example, your credit score and credit report will suffer if you miss a minimum credit card payment or a periodic loan repayment. This hampers you ability to secure credit in the future. If you miss one or more car payments, the lender might repossess the vehicle. Missing mortgage payments can lead to foreclosure and loss of your home. The Internal Revenue Service can assess a levy for failure to repay back taxes. If you fail to make child support payments, you might be looking at jail time.
Managing Recurring Debt
Quicken has an automatic bill scheduling and payment feature to ensure you never forget to pay a recurring bill or court-ordered payment. You can link your credit and loan accounts to Quicken and automatically set payments at specified intervals. These features automatically update Quicken's budget tool, your checking account and your debt balances. Quicken also has a feature that recommends how to pay down debt in the most efficient way. In addition, you can set automatic reminders, such as the date when a child is no longer legally entitled to support payments.