Is There Any Right Amount of Debt?

No ‘one-size-fits-all’ advice is likely when considering the right amount of debt to acquire.  However that doesn’t mean there are no good strategies at all.

As expected, credit card companies and other lenders are glad to make accessible as much money as they believe their borrowers will repay.  They assume risks, but those are calculated risks.  They look at default rates, current interest rates and cautiously evaluate credit history when they make loans.  Borrowers can gain by following a few aspects of their strategy.

Prior to taking out new credit, think about the chances that you will have to default on repayment.  Don’t factor in to your assessment the prospect of deliberately defaulting or filing bankruptcy.  You’ll find the outcomes are hardly ever worth it and that should be set aside as a very last resort.

You can factor in anticipated increases in income – banks and other business do – but you should be very sure you’re really going to get it.  A promised salary increase or hoped for income from a stock sale is far from sure money.

Consider current interest rates and make a forecast about where they are directed, businesses do.  That’s a very complex thing to be certain about, but general trends are not accidental.  Look at bonds, futures and other indicators.  If 6% bond option prices are coming down, lots of pros are gambling interest rates will go up to above that in the future.  These correspond to the bets of professionals about the future course of inflation and interest rates.

View your own credit history the same way a bank would.  Try to see it from their standpoint.  Would you loan yourself $10,000 at 7% for 48 months?  Avoid justifying late payments or defaults.  You may have had a valid reason, or you may not yet have developed the resources (inner and financial) to pay back all your debts on time.

Think about your total income and expenses logically.  You may badly wish for a new car, but can you pay for an additional $500 per month without sacrificing basics while still meeting your present obligations?  Be truthful with yourself.

No one can decide for you whether it’s worth putting on an ongoing $200 per month credit card payment at 12% just to have a luxury you’ve been yearning for.  You may value having the item today more than you value the additional money it will cost you over what you keep by saving for it.

But you should at least ponder it.  Impulse buying is the most familiar way credit card users get in over their heads, financially speaking.  See the possibility that if you hold back (and saved for, say, a year) you will have both the item and something else you can buy with the money you would have paid in interest.

Evading the fact, if it is a truth, that you can’t really afford the payments is the most certain way to get into financial trouble.  That kind of dilemma can take months or years to escape from.  Think long term, be practical, and you’ll be able to settle on what is the right amount of debt for you.