Avoiding Bankruptcy Isn’t The Only Reason To Pay Down Debt: How Much Credit Should You Have?

28 Feb Avoiding Bankruptcy Isn’t The Only Reason To Pay Down Debt: How Much Credit Should You Have?

Too much debt often leads to bankruptcy, but avoiding bankruptcy isn’t the only reason to reduce your debt load. The current economic crisis has reminded us all to look at our debt to income ratios.

In the recent past, creditors have helped us forget to consider what is an appropriate amount to oweas they encouraged us to put everything on a credit card. There are some simple standards to follow and a few simple formulas to calculate how much debt you can afford.

  • What should you spend on housing?

Generally speaking, all of your housing costs, whether it is for your mortgage or rent, should not exceed 33% of your income. So if you take all of your take home pay plus all other income from any source and divide that by three, the answer should be more than what you pay for rent or or all of your mortgage payments, taxes and insurance on your home.

  • What should you owe for debt payments, loans and other revolving debt?

In addition, credit cards, car loans and other payments like student loans, medical expenses and store accounts should be less than 20% of your income.

This is the “debt to income ratio” that everyone talks about. There is a simple form to calculate this formula if you want to calculate it yourself.

  • When should you be worried about your budget?

More than 50% for combined housing expense and debt expense is a warning sign that your budget is out of whack. Now that creditors are beginning to pay attention to sound lending practices, it is time to determine whether you are a good credit risk. Many creditors may look at available credit limits as if you have already spent that money, thus disqualifying you for future credit.

If you are over the limits, it is time to stop spending and start working on paying off your outstanding debts.

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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