How much credit card debt can you afford?
This is a writing sample from Scripted writer KENNETH RAY
Okay, so a brand new credit card with a spending limit of $5,000 just arrived in the mail. What do you do? If you're like most, you activate it over the phone, and immediately begin racking up credit card debt without ever considering whether the spending limit is reasonable or not. After all, the card issuer wouldn't approve more than you could afford would it?
Before accepting your lender's determination of your credit capacity, consider this easy to follow, three-step process to calculate how much credit card debt you can afford:
STEP 1: DETERMINE YOUR PAYMENT
Your spending limit should depend less on your lender's determination and more on your monthly budget. Take an honest look at your monthly budget and expenses to determine the payment amount you can easily make.
STEP 2: APPLY THE "20 TIMES RULE"
If your budget dictates a maximum payment of $50, apply the 20 times rule to calculate your spending limit. Multiply your monthly payment times 20 to calculate your spending limit ($50 x $20 = $1,000). If you can afford a payment of $100 the 20 times rule suggests a spending limit of $2,000 ($100 x 20).
If you have the financial discipline to self-impose a spending limit of $2,000 when the card issuer has offered you $5,000, by all means do it. If not, it's perfectly okay to call the lender and request a lower limit. They will be shocked, of course, but they'll eventually get over it.
The beauty of the 20 times rule is it ensures that your payment will always be more than the minimum, and it keeps the amount of your credit card debt in check, making it much easier to reduce or eradicate your debt entirely should you so desire.
STEP 3: MAKE ADJUSTMENTS AS NECESSARY
As your income grows and your ability to repay your debt increases, it's very easy to increase your spending limit if needed, especially if your payments have been consistent and on time. Usually, it's as simple as calling customer service and answering a few questions.
Remember, accepting a credit card means saddling yourself with potential long-term debt. There's nothing wrong with having some control over the amount you will ultimately have to repay.
Photo: Sean MacEntee. Some Rights Reserved. Photo license: https://creativecommons.org/licenses/by/2.0/
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