General Rules for Credit Capacity

April 13, 2006

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Although it is difficult to precisely measure your credit capacity, there are certain rules of thumb that you can follow. Experts suggest that you spend no more than 20 percent of your net (after-tax) income on credit purchases. Thus, if your take-home pay is $2,000 a month, you should spend no more than $400 a month for consumer debt payments. Do not include payments on mortgages or home equity loans.

Spend no more on credit purchases than you can afford to pay off in 12 to 18 months. This rule applies to short-term debts, but does not include car loans or education expenses.

You have balances outstanding on two credit cards that total $3,000 on which you are paying $150 per month. You would have to increase the payments to, at least, $250 plus the new interest accruing each month, in order to pay off the loans within 12 months.

Only you, based on the money you earn, your current obligations, and your financial plans for the future, can determine the exact amount of credit you need. You must be your own credit manager.