Total Debt: What is the Right Amount of Debt To Handle?

When considering adding to your total debt load there is no 'one-size-fits-all'. Here are our recommendations to add to your own good judgement.

Lenders, including credit card companies, will gladly lend as much money as they think you can repay. Although they take risks, they are calculated risks.

Lenders consider default rates, current interest rates and carefully review your credit history when they make loans. You can benefit by following some of their strategies.

So before taking on new credit and adding to your total debt load, consider the odds that you may default on repayment. We're NOT suggesting the possibility of deliberately defaulting or filing bankruptcy.

The consequences of default or bankruptcy are very serious and should be considered a very last resort. But knowing how much you can afford to repay helps you to understand how much you can charge.

You can factor in an expected increase in income as lenders do. However, you should be very sure you're actually going to receive that pay increase. A hoped for gain from a stock sale is far from guaranteed money and not something to be factored in when considering how you will pay off your debt.

Total Debt Load - Interest Rates

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Review current interest rates and make a calculated prediction about where they are headed. Interest rates are a very difficult thing to predict, but general trends are not random. Professionals look at bonds, futures and other indicators. For example, if 6% bond option prices are going down, many pros are betting interest rates will rise to above that in the future.

Review your own credit history the same way a lender would. Would you loan yourself $12,000 at 7% for 60 months? You should avoid rationalizing late payments or defaults (especially to yourself).

You may have had a legitimate reason, or you may not yet have developed the resources (inner and financial) to repay all your debts on time. Be honest with yourself.

Factor your total income and expenses realistically. You may really want a new car, but can you afford an extra $450 per month without sacrificing essentials and still meet your current obligations? Again, be honest with yourself. You can check out the Debt Action Guide for help in assessing your total debt load.

Only you can decide for yourself whether it's worth taking on a $200 per month credit card payment at 12% in order to have an item you've been dreaming about. It costs you less to save up for the item because you don't have to pay the interest, but you may value having the item today more than you value the extra money it will cost you. At the very least, get into the habit of thinking about it first.

Impulse buying is the most common way credit card users get in over their heads with their total debt load. Consider the possibility that if you wait and save for a year, you would have both the item and something else you can purchase with the money you would have paid in interest.

Ignoring the fact that you can't really afford the added payments is the surest way of getting into financial trouble. That kind of trouble can take months or years to correct. Think long term, be realistic, and you'll be able to decide on the right debt load for you.


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