Ohio State University Extension/Research

Manage Your Money

Lesson 4: How Much Credit Can You Afford?

MYM-3-03

Can I Afford to Use More Credit?

(Note: Refer to "Know What You Owe" Worksheet 2-A)

wallet Let’s say you really want a new television, but you don’t have the money for it. What do you do? Do you borrow the money, or do you wait until you can save some money and buy it later? Consider these basic guidelines when thinking about borrowing money.

Use the 20 percent rule. Your total debt load (except for your mortgage payment) should not exceed 20 percent of your yearly after-tax income.

Caution! This maximum may still be too high for some families, particularly those with an uncertain job future, a low income, an irregular income, or a large family.

Worksheet 4-B: Credit Signal Light

Total monthly take-home pay = $ _________


Total monthly debt owed = $ _________
(Total consumer debt excluding home mortgage)


10% of take-home pay = $ _________


20% of take-home pay = $ _________

Stop light RED-STOP!!
  • Monthly credit payments take 20% or more of take-home pay. STOP! Avoid more credit.

YELLOW!

  • Take-home pay. CAUTION! Control new credit use and repay current obligations.

GREEN

  • PROCEED CAREFULLY. Use credit wisely. (Try to keep monthly payments under 10% of your take-home pay.)

Source: Home, Yard and Garden Fact Sheet #5002, prepared by Carolyn McKinney, Family Resource Management Specialist, Ohio State University Extension, 1983.

Use the "Credit Signal Light" (Worksheet 4-B, above) to help you. Write down how much money you bring home monthly. Multiply the amount by 0.20 for the maximum amount of credit you can afford. Compare this to your current monthly payments as listed on "Know What You Owe" (Worksheet 2-A).

Now decide-can you really afford to purchase that new television?

How much credit you use is really a personal decision, but do look at your needs realistically. Credit is just one part of your spending plan. Consider carefully before obligating any of your future income.

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Written by Ella Mae Bard, Extension Agent in Family & Consumer Sciences, Knox Co., Carolyn McKinney, Family Resource Management Specialist, Consumer & Textile Sciences Dept., Nancy Hudson, Northeast District Family & Consumer Sciences Specialist, and Diane Johnson, Extension Agent in Family & Consumer Sciences, Darke Co., Ohio State University Extension. Portions adapted from "Managing Your Money," prepared (1994, 1996) by Eleanor Ames, former OSU Extension Agent (Madison Co.) in Family & Consumer Sciences.

For more information about family life issues, visit http://families.osu.edu

Manage Your Money is a six-part self-study course. The lessons include:
  1. Getting Started
  2. Where Does Your Money Go?
  3. Stop Spending Leaks
  1. How Much Credit Can You Afford?
  2. Develop Your Budget
  3. Your Net Worth and Financial Records

Appreciation is expressed to Marjorie McCullough, Office Associate, Consumer and Textile Sciences Department, who worked with several drafts of these materials.

This material is intended only for educational purposes. Mention of a proprietary product, trademark or commercial firm in text or figures does not constitute endorsement by Ohio State University Extension and does not imply approval to the exclusion of other products, firms, or organizations. For specific, consult your financial or legal adviser.

All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.

TDD No. 800-589-8292 (Ohio only) or 614-292-1868