Differentiate Between Necessities and Extras Before Using Credit
Before deciding to use credit, essentially a type of debt, it is first important to examine wy credit is being used in that particular situation.
Sometimes it is OK to use credit. Good debt pays for urgent necessities a person can't afford at the time, like a home, car or education.
A lot of credit that people use however is bad debt. People who live beyond their means, use credit to buy things they really can't afford, are getting themselves into bad debt.
Every time you make a purchase with credit, think about if you are creating “good debt, or bad debt.”
When deciding whether to use credit to make a purchase, some thing to consider are: cant the purchase can be postponed, what is the minimum amount of credit the purchase would require, what is the interest rates, are there additional fees (any added cost of purchasing something on credit), and *what must be sacrificed to pay off the credit debt.
Credit use should be limited to purchases that may increase in value, large and necessary purchases, true emergencies, purchases that can only be made with credit cards and purchases that can be paid off in full when the next credit card bill arrives.
Generally, total debt payments including mortgage payments should equal no more than 36 percent of monthly after-tax income. However, each person is comfortable with a different amount of debt. This is called a personal credit limit. This limit often depends on stability of income sources, possible financial changes, upcoming expenses and other personal considerations. Some personalities tolerate a little higher or lower amounts of debt. Late payments or stress about debt are signs of exceeding a personal credit limit.
Sometimes, special circumstances alter some decisions about credit and debt. For example, if interest earned by having money in savings is more than the cost of a loan, it may make sense to take out a loan. Also, financial planners generally suggest that if there's a choice between saving for children's education and saving for retirement, choose retirement and borrow for the education. Students may be able to get better loans, and children would potentially have more income for loan repayment.
Source: Kathy Prochaska-Cue, Ph.D., family economic specialist
