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What Is the Right Amount of Debt?

When it comes to debt and frankly anything to do with money, you'll find that there is no one size fits all recommendation, but there are some general guidelines to keep in mind.

First, be aware that lenders like credit card companies are going to be happy to give you as much money as they think you will repay. These are calculated risks that they are looking at taking, and they will consider things like credit interest rates, default rates and your credit history when they go to make loans. How can you use their strategies?

When you are in a place where you can take out new credit, consider the odds that you may have to default on the prepayment. Don't think about things like deliberately defaulting or filing for bankruptcy; these things are seldom worth it, and should only be brought into play as a last resort.

Consider things like expected increases in your income because the banks certainly will, but make sure that this is an increase income that you know that you are going to get. Promised raise or income from a possible stock sale is not sure money.

Take a look at the interest rates as they currently stand and consider where they are headed. This can be something that is very hard to be certain about, but get familiar with the trends. Consider futures, bonds and other indicators. For instance, if 6% bond options prices are going down, most pros will bet that interest rates will rise above that in the future. This, once again, is a calculated risk that depends on inflation and interest rates.

Consider your credit history and think about what a banker would think. How do you look when you are sitting in their chair? Are you a good bet for a $10,000 dollar loan at 7% over 48 months? Don't rationalize late payments or defaults because they are not going to. Consider what resources you need to pay on time.

What is your income and what do your expenses look like? Even if you really want a new car, this might not be the time to purchase one. After all, can you add an extra 500 dollars every month to your budget? Be honest!

You are the only one who can decide how much an ongoing $200 per month credit card payment at 12% interest is going to affect you. What is the item you are looking into purchasing and how much is it worth to you? Can you put off buying it now and wait until you are in better shape?

Remember that you should put a lot of thought into decisions like this one. Impulse buying is a big problem when it comes to credit card debt, and this is where a lot of people get in over their heads. What are the benefits of waiting until you have the cash you need and whether you are going to be able to purchase something else with the money you would save on interest.

If you cannot really afford the payments, you are headed straight for financial trouble. This is the kind of trouble that can take months or even years to escape, so make sure that you think in the long term and with realistic expectations. This can help you figure out the right amount debt for you to carry.