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People sometimes get in too deep with debt because they don't know when to stop taking on more debt. There's no thermometer or gauge that lets you know you're reaching your limit so it's easy to just keep charging and taking out loans until the banks cut you off. However, by the time that happens, it's often too late.
Debt creeps into your life. Minimum payments give you the false sense that you can handle more than you really can. Because you're only repaying a fraction of your debt, it feels like you can actually take on more.
Debt allows you to get used to living a lifestyle that's really outside of your means. For example, with credit cards and loans, you may be able spend $4,500 per month even though you only make $3,500. However, once your credit cards are maxed out and you can't take out another loan, you'll only able to spend your income, nothing more. But because you're used to spending $4,500 per month, you run into trouble when your debt lines are cut and you have to rein in your spending. The truth is that you could never really handle all the debt you were taking on, but the debt was giving you the false impression that you could.
Most experts say that you shouldn't spend more than 10% of your income on "bad debt" like credit card balances. Anything more than that is too much. Divide your income by.40 (a number that would get an average 4% minimum payment) to get an average amount of debt you can take on. For example, if your monthly income is $3,000, you could only afford to take on around $7,500 of debt if you want to keep your minimum payment around $300 per month. If you know you can't afford a higher minimum than that, avoid taking on more debt.
If you know what amount you can afford to pay on your debt, divide that number by.05 for a 5% minimum payment or.03 for a 3% minimum payment to decide how much debt you can handle. For example, if you can only manage a $100 minimum payment, then you can't afford to take on more than $2,000 of debt.
Remember the best way to stay out of debt is to pay your balances in full every single month, no excuses. With that reasoning, you really can't afford to take on more debt than the income you have left over after all your bills are paid every month. If you only have $100 left, you can only afford a $100 credit card purchase. And if you're living paycheck to paycheck, you can't handle any debt at all.
Not many people pay their balance in full every month. The benefit of having a credit card is that it's not required. If you know you're going to pay your balance over time, be smart about the amount of debt you can take on. Avoid making new purchases when you already have a credit card balance. Instead, pay off your current balance before charging more. Avoid creating a dependency on debt because it tempts you to forget your limit and charge to your heart's content.
Steve Dowell is an expert writer on subjects related to debt settlement and debt relief strategies like counseling and consolidation. Read more on his blog debtsettlement.com.
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