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While carrying too much debt can create problems, taking on some debt can be beneficial in the long run. The key is to understand when to apply for a new loan or line of credit. Here are a few tips to help you figure out how much debt you can handle.
First, compare your income to your level of debt. It can be helpful to calculate your monthly debt-to-income ratio (DTI) by dividing the amount you owe, such as on mortgages and credit cards, by the amount you make. It can also be useful to take a look at your budget and see how an additional debt payment would impact the amounts you could spend and save each month.
Debt can be used for a variety of purposes. Debt can be used for reasons that may improve your financial situation, such as a home mortgage or a student loan. Debt can also be used for items that will decline in value, such as a wardrobe spending splurge, financed on credit cards. If your debt-to-income ratio is high and is made up primarily by credit card debt, you may want to concentrate on your current payments before taking on any more credit.
While it’s easy to focus on the bottom line of your monthly loan or credit card statement, take a look at the finance charges and interest payments you’re making each month. If you calculate your interest payments and find that you’re paying as much – or more – in interest as you are on the principal of your debt, you may want to increase those payments before you take out a new loan.
If you keep an eye on the big picture, you can make sensible choices about what debt to take on – and what to avoid. Taking a proactive approach to debt management can go a long way toward helping you reach your financial goals.
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