How Much Credit can you Afford?
by Cindy Morus · 2 min read
Before making the decision to add more debt, you need to make sure that you:
*Allocate sufficient money for your essentials.
*Borrow only for items that you need and can afford.
*Borrow only if you're spending less each month than you take home.
1. Start with your monthly take-home pay.
This is the amount you have left after taxes and other deductions have been made.
2. Subtract the amount you need for necessities and fixed expenses.
This includes savings, your mortgage or rent payment, utilities, food, transportation, child care, medical care, clothing, and recreation. Include payments made on a quarterly, semi-annual, or annual basis, such insurance and taxes.
3. Subtract monthly payments for existing loans and credit cards.
4. The balance is the amount you can safely apply to debt repayment.
Avoid thinking you can spend all this amount, since emergencies do occur, and you may not wish to use your regular savings account to cover small, unexpected expenses.
Monthly Take Home $ _______________
Fixed Expenses ---- $ _______________
Loans/Credit Cards ---- $ _______________
Amount Available For Additional Debt $ _______________
Moral of the Story: If youre planning to buy a new house or car, pretend you have already done so and start making the payment but to yourself. Within a few months, youll know whether or not you can really afford it and youll have some money set aside for repairs, etc. when you actually do make the purchase. If you cant make the pretend payment, you certainly wont be able to make the real one consistently. Time to go back to the drawing board and figure out what else youre willing to give up in order to have the new debt.
HOW TO MANAGE CREDIT CARD USE
Many people find themselves with credit problems because they don't keep track of purchases they make with their credit cards. A simple method of keeping track of monthly credit card charges is to:
1. Determine the total amount you can responsibly charge on all your credit card accounts during that month.
2. Keep track of your credit spending in the same way you maintain a running balance of your checking account.
3. Subtract each amount charged from the monthly charge limit you set.
4. Stop using your credit cards if you draw this balance down to zero.
Frequently asked questions
Which debt should I pay first?
Mathematically the highest interest rate; psychologically the smallest balance. Both work — pick the one you will actually stick to.
Will debt settlement wreck my credit?
It usually does damage it, and the forgiven amount can be taxable. Read any agreement in full before signing.
How much debt is too much?
If non-mortgage debt payments exceed about 15% of take-home pay, the budget is under real strain.
General information only — not financial, legal or tax advice. Check figures with a licensed professional before acting.