What's The Right Amount of Debt?
No 'one-size-fits-all' recommendation is possible when considering the right amount of debt to assume. But that
doesn't mean there are no good guidelines at all.
Naturally, credit card companies and other lenders are happy to make available as much money as they think their
borrowers will repay. They take risks, but those are calculated risks. They look at default rates, current interest
rates and carefully review credit history when they make loans. Borrowers can benefit by following some aspects of
Before taking out new credit, consider the odds that you will have to default on repayment. Don't factor in to your
decision the possibility of deliberately defaulting or filing bankruptcy. You'll find the consequences are rarely
worth it and that should be reserved as a very last resort.
You can factor in expected increases in income - banks and other business do - but you should be very sure you're
actually going to receive it. A promised raise or hoped for income from a stock sale is far from guaranteed
Look at current interest rates and make a prediction about where they are headed, businesses do. That's a very
difficult thing to be confident about, but general trends are not random. Look at bonds, futures and other
indicators. If 6% bond option prices are going down, many pros are betting interest rates will rise to above that
in the future. These represent the bets of professionals about the future direction of inflation and interest
Look at your own credit history the same way a bank would. Try to see it from their perspective. Would you loan
yourself $10,000 at 7% for 48 months? Avoid rationalizing late payments or defaults. You may have had a legitimate
reason, or you may not yet have developed the resources (inner and financial) to repay all your debts on time.
Consider your total income and expenses realistically. You may badly want a new car, but can you afford an extra
$500 per month without sacrificing essentials while still meeting your current obligations? Be honest with
No one can decide for you whether it's worth assuming an ongoing $200 per month credit card payment at 12% in order
to have an item you've been longing for. You may value having the item today more than you value the extra money it
will cost you over what you save by saving for it.
But you should at least think about it. Impulse buying is the most common way credit card users get in over their
heads, financially speaking. Project the possibility that if you wait (and saved for, say, a year) you will have
both the item and something else you can purchase with the money you would have paid in interest.
Evading the fact, if it is a fact, that you can't really afford the payments is the surest way to get into
financial trouble. That kind of trouble can take months or years to get out of. Think long term, be realistic, and
you'll be able to decide what is the right amount of debt for you.