Nearly every American is walking around with at least some debt. But how do you avoid being drowned in too much debt? How much is too much? These tips will help you determine how badly you are in debt and how to avoid going into unsustainable debt scenarios.
One way to know whether you are going into too much debt is to look at your debt to income ratio. This quick calculation can give you an idea of whether you are in financial distress and thus be helpful in helping you to make any financial decisions. To calculate the ratio, you just need to add up all your monthly debt obligations such as mortgage and car payments, and divide the result by your monthly income. Obviously, the lower the debt-to-income ratio, the better off you are financially because that means you have extra money to save and invest. In general, it is better if your debt-to-income ratio is less than 36%.
Once you understand your financial situation, whether it is good or bad, it is more important to learn some tips on how to avoid going into too much debt. The followings are a list of tips that can help you accomplish that goal:
Pay off the credit card bill every month
Everyone who has credit cards should pay off the balance every month. It is really not recommend paying just the minimum payment because it barely covers the interest on your credit card balance. In the worst scenario, you should pay at least 10% of your balance. If you carry a balance from one month to the next it can snowball into a significant amount quite quickly. Read this article about this situation and how to deal with it.
Budget
It is important to do budgeting because it helps you to keep track on where do you spend your money and hence where to cut down some unnecessary expenses. In addition, with a good money management, it is easier to do some saving every month. It helps you to avoid getting into too much debt because you may not need to take on debts if there is an emergency spending. See our budgeting section for more information.
Don’t charge what you can’t afford
It may seem obvious, but you will be surprised on how many people buy things that they can’t afford and live above their mean. Before making a purchase, ask yourself: can I afford this? Do I really need this?
Consider a secured line of credit instead of a credit card
If you own a house or have other assets, you may want to consider using secured lines of credit instead of a credit card. Both are similar in a sense that you can borrow and pay the balance off over and over in an ongoing basis. However, the interest rate on secured lines of credit is much lower than the rate on credit card. Therefore, it is better to borrow with a line of credit in case of the situation when you are behind your monthly payment. Note that if you default on line of credit, the ownership of your collateral (whatever you agreed to give up if you default) will be transferred to the creditor.
Spend times to find the lower cost of borrowing
If you decide to take on some debts, spend some times to do research and review offers from different institutions. Never borrow money on the spur of the moment. You will be paying the price for years to come if you don't think it through.
