NDSU Extension Service - Ramsey County

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How Much is to Much?

How Much Is Too Much?

 

Credit is often easy to obtain but difficult to manage.  Accumulating too much credit debt is a common problem for all income levels. Many financial advisers suggest avoiding a commitment of more than 20 percent of take-home pay to debt repayment (excluding home mortgage). These signals may indicate you’re headed for credit problems.

• You find yourself paying only the minimum balance due.

• You can’t pay all the bills that come due each month, so you pay some and ignore others.

• You are always out of cash and tend to charge items you used to pay for on the spot.

• You borrow money to pay old debts.

How much you pay for credit is influenced by how much you borrow, how long you borrow, from whom you borrow, whether you borrow with or without collateral, and what’s in your credit record.

Credit has a cost— you are renting someone else’s money. You must pay back what you borrow by a certain date, plus pay interest. To keep credit costs down, do some comparison shopping.  Look for these two terms: finance charge and annual percentage rate. The finance charge is the total dollar amount you must pay for credit. The annual percentage rate (APR) is the yearly charge for credit stated as a percentage. The APR is the rate you pay per dollar per year for the credit you use. The lowest APR is usually the best credit buy. However, consider the size of the payments and the total cost of the loan as well.

Credit itself is neither good nor bad. It depends on how you use it.  Credit cards are convenient and much safer to carry than large amounts of cash. Buying on credit also allows you to use goods you can’t afford to pay for right on the spot.  However, since credit adds to an item’s cost, this may not be the best way to manage money.  You may be tempted to buy more than you really need, just because it’s easy to say “charge it.” Families who habitually buy on credit can end up adding as much as 18 percent or more to the cost of goods and services. Finally, if you’ve tied up too much income in credit payments, you may have trouble paying for basic needs.

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