Setting Reasonable Debt Limits (1280)

The use of consumer credit is a major part of managing money. To be effective, credit must be used responsibly.

To help guide credit use, develop a personal or household debt ceiling. This ceiling is the maximum percent of take-home pay to be committed to debt payments. Exclude mortgage payments and those payments normally paid in full each month. A good rule of thumb is that your debt load, excluding your home mortgage, should not exceed 20 percent of your take-home pay. A safe limit would be 10 percent. When it starts going over 15 percent, it is time to be concerned.

To develop a personal debt ceiling figure, consider the following three questions:

1. What special living expenses do I have? These might be for a disabled household member or based on values such as hobbies, music, sports, carpentry, or crafts. The larger the commitment to special living expenses, the lower the debt ceiling figure will need to be.

2. How much available cash do I have for emergencies? Personal financial planners generally recommend three to six months expenses in readily available cash or unused credit capacity.

3. How long will it take me to pay off current debts? Add up your debts and divide by your typical monthly payment. If the answer is more than 12 months, do not add to your present debt load.

For more information on this subject, Please visit the College of Agricultural Sciences Publications Web site.

Feel free to forward, post or reprint any of the "Solutions" in their entirely, but please credit http://www.solutions.psu.edu/ as the original source of information, and please do not change the content.