We sometimes find ourselves in situations that demand the availability of large sums of money, such as when we need to buy essential items for our homes, including a dishwasher or a refrigerator. We may not have enough money at our disposal to enable us make such a purchase, and therefore we resort into borrowing money. However, as we continue borrowing in order to meet our financial needs, we must be in a position to tell the point at which we should stop borrowing, in order not to borrow too much and mess our financial position.
In order to help people avoid such situations, most financial analysts use a basic rule of thumb in order to determine the upper limits of personal debts.
Most of these analysts limit the maximum payment to no more than 20% of an individual’s take home pay. For instance, if an individual’s net pay is£ 2200 per month, then his or her personal debt payment, including personal loans, car loans, education loans, as well as credit card, should not be more than £440.
In most cases, it is very hard for anyone to keep his or her debt spending in conformity with the prescribed repayment range. This means that many of them encounter many challenges when it comes to credit spending. Most people exceed the safety limits on debt payments because of the ease of using credit cards to make payments. In order to pay the minimum or keep their payments current, many people resort to juggling credit cards.
It is important to always remember that the 20% repayment margin is the maximum. If you want to maintain a good credit rating, your repayment margin should ideally be between 10 to 15 % of your net monthly take-home pay. The remaining balance of 80% should go to such expenses as rent, utilities, as well as groceries, among other expenses.
Use of credit cards has made it very easy for people borrow. Avoid as much as possible using your credit card to buy luxurious items that you may not have even budgeted for. This can easily lead to a financial crisis that would be hard to manage.
To avoid such a situation, you need to know the point at which your credit spending has started to spiral out of control. There are several warning signs that can help tell you need to check your credit spending. According to Lawrence J. Gitman and Michael D. Joehnk,who are the authors of a book known as ‘’Personal Financial Planning”, the following are some of the signs that show a person is heading for serious financial problems:
-He or she regularly uses credit for unplanned expenditure, for example, buying things on impulse.
-The individual regularly exceeds the borrowing limit on his or her credit card.
– The individual takes 60 to 90 days to clear bills that he or she used to pay in 30 days,
– The individual is always reluctant to add up the bills in order to avoid facing the stark reality of his or her overextended credit.
– The individual can hardly make the minimum required payments.
– The individual has no savings.
– He or she has to borrow in order to make ends meet.
Failure to take into consideration these critical signs can lead to worse consequences than a bad credit rating. Other serious consequences that can result out of ignoring these signs include increased interest rates on your new car loan and personal credit card. Your ability to buy a house is also affected. This is because all of these things are pegged on your personal credit rating as well as your ability to repay. Therefore, it is very important not to let your debt spiral out of control.