Debt Checklist: Are You Carrying More Debt Than You Should?

The amount of debt that a person can comfortably handle is of course as varied as people’s individual circumstances. However there are some guidelines to consider when determining how much debt you can carry.

Credit card companies risk a lot to extend as much credit as they believe they will receive payment on. But they don’t extend credit blindly. They do their homework, checking current interest rates, credit history, and default rates before extending credit. Borrowers can learn from their methods.

When you are thinking about applying for more credit, think seriously about it and honestly consider if there is any possibility that you will be unable to repay the debt. Never think of bankruptcy or defaulting on the debt as an option. That type of thinking has disastrous results.

It is okay to consider anticipated increases in your salary. After all the credit companies consider this as well. However, be sure that these increases are sure to happen. It’s not your money until you actually receive it.

Look at current interest rates and make a prediction about where they are headed, businesses do. That’s a very difficult thing to be confident about, but general trends are not random. Look at bonds, futures and other indicators. If 6% bond option prices are going down, many pros are betting interest rates will rise to above that in the future. These represent the bets of professionals about the future direction of inflation and interest rates.

Look at your own credit history the same way a bank would. Try to see it from their perspective. Would you loan yourself $10,000 at 7% for 48 months? Avoid rationalizing late payments or defaults. 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.

Make an honest assessment of your income and expenditures. You may really want a new car, but can your budget handle it? Be realistic as to whether you can handle a new car payment and still meet you other monthly financial obligations.

No one can decide for you whether it’s worth assuming an ongoing $200 per month credit card payment at 12% in order to have an item you’ve been longing for. You may value having the item today more than you value the extra money it will cost you over what you save by saving for it.