If the lender is unable to collect on a loan, whether secured or unsecured, there are consequences for the borrower. Defaulting on a loan is a serious business, and can impact your credit rating, resulting in an inability to take out new loans. In more serious cases, it may lead to legal action.
That's why the first step in using credit wisely is figuring out how much credit you can afford to take on. You need to take a long, hard look at your current and future financial situation before you take on any new debt. As part of this analysis, you should look at your debt ratio and set a realistic budget for debt repayment.
Let¡¯s say you really want a new television, but
you don¡¯t have the money for it. What do you
do? Do you borrow the money, or do you wait
until you can save some money and buy it later?
Consider these basic guidelines when thinking
about borrowing money.
Use the 20 percent rule. Your total debt load
(except for your mortgage payment) should not
exceed 20 percent of your after-tax income.
Caution! This maximum may still be too high
for some families, particularly those with an
uncertain job future, a low income, an irregular
income, or a large family.
Use the ¡°Credit Signal Light¡± (Worksheet 4-A,
below) to help you. Write down how much money
you bring home monthly. Multiply the amount
by 0.20 for the maximum amount of credit you
can afford. Compare this to your current monthly
Now decide¡ªcan you really afford to purchase
that new television?
How much credit you use is really a personal
decision, but do look at your needs realistically.
Credit is just one financial tool for your spending
plan. Consider carefully before obligating any of
your future income.