How to know when a little debt is too much debt
How do you know when a little “acceptable” debt becomes a potentially dangerous situation? For some, the crisis is as clear as being faced with a decision between taking on more debt or letting their families go hungry. For most, the clues are more subtle. As a general rule, no more than 20 percent of your disposable income should go toward debt payments (not including your mortgage). In addition, a “yes” to any of these questions should give a pause for thought.
- Is an increasing percentage of your income going to pay off debts?
- Is your savings cushion inadequate or nonexistent?
- Are you near or at the limit of your lines of credit?
- Can you only make the minimum payments on your revolving charge accounts?
- Are you extending repayment schedules – paying in 60 or 90 day bills once paid in 30?
- Are you chronically late in paying your bills?
- Are you paying bills with money earmarked for something else?
- Are you borrowing money to pay for items you used to buy with cash?
- If you lost your job, would you be in immediate financial difficulty?
- Are you unsure about how much you owe?
- Are you threatened with repossession of your car or credit cards, or other legal action?
While a single red flag is not a sign of impending doom, it is an indication that you need to make a change.