Set Your Own Debt Limits
Credit can be a valuable tool that allows you to purchase major items and pay for them over time. But the ready availability of credit also makes it easy to incur more debt than you can comfortably repay. Rather than allowing lenders to set credit limits for you, evaluate your financial situation and determine your own limits. To find out where you stand with consumer debt, which includes all debt except your mortgage, make a list of your debts and monthly payments. Then calculate your debt ratio by dividing your monthly debt payments by your monthly net income. The general guideline is that your debt ratio should not exceed 10% to 15% of your net income, with 20% usually considered the absolute maximum. However, you should consider your own circumstances and decide how much debt you are comfortable with. Before purchasing something on credit, carefully evaluate whether it makes financial sense to do so. Some questions to ask yourself include:
Should I wait and save the money so I can pay cash for the item?
Will the cost of the item increase or decrease in the future?
Is it really worth paying interest on the item so I can use it now?
Will I still be within my designated debt limits if I add this new debt payment?
Will the item still have value after I finish paying for it?
Setting your own debt limit and carefully evaluating whether you should purchase an item on credit should help you keep your debt under control.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.