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How Much Credit Card Debt Should You Carry
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Before you make another major purchase, do some calculating.
So you've just bought your dream car. And you're still making the monthly mortgage payments on your dream house.
Now, you hear the latest model of the home theatre equipment you've been dreaming about is being old at a special introductory price at the mall. Continue below.
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Before you rush off to the mall and whip out your already overused credit card, sit down at your desk, do some thinking and start calculating.
Do you know how much you currently owe - on your credit cards, to your bank, your mother, your friend? Do you know how much your debt is costing you?
If you are like most people, chances are you don't know.
It's also likely that you're underestimating the interest rates you are paying.
The first step to preventing your debts from weighing you down is to learn how to prioritize them.
To do so, compile a list of your credit card, mortgage, auto, and other loans along with their balances, interest rates, and monthly payments.
Add up the minimum monthly payments on all your loans and figure out how much more you can afford to pay each month.
Apply that additional payment to the highest-rate debt on your list; when it's paid off, choose the second highest-rate as your next target.
It's smart to have your personal budget at the start of the year to project how much debt you can carry.
Unless you have offsetting assets and savings, your mortgage payment shouldn't be more than 25% of your total pre-tax income, with another 5% from taxes, insurance, and routine maintenance.
Your car payment shouldn't be more than 15% of after-tax income, with another 5% for insurance and routine maintenance.
By then, you've already used up half your income.
Of the other half, try to set aside 10%. Some, but not all, of that can go toward onetime purchases.
If emergencies arise, you can use the money for that purpose; what's left at the end of the year should be put into a tax-deferred savings plan.
If you don't have that kind of discipline, at least restrict the amount you spend on non-routine items to 10%, which will sharply increase your chances of staying out of ruinous debt in the future.
If you have done all your calculations and honestly found your debt still at manageable level, go ahead and rush off to the mall before someone else beats you to your dream home theatre equipment.
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