Credit

advantages and disadvantages of credit

advantages:

• Able to buy needed items not.
• Don’t have to carry cash
• Creates a record of purchases
•  More convenient than writing checks
• Consolidates bills into one payment

disadvantages:

• Interest (higher cost of items)
• May require additional fees
• Financial difficulties may arise if one loses track of how much has been spent each month
• Increased impulse buying may occur

how much can you afford? (the 20-10 rule)
 

never borrow more than 20% of your yearly net income

• If you earn $400 a month after taxes, then your net income in one year is:

                              12 x $400 = $4,800

• Calculate 20% of your annual net income to find your safe debt load.

                             $4,800 x 20% = $960

• So, you should never have more than $960 of debt outstanding.

• Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards.

monthly payments shouldn’t exceed 10% of your monthly net income

• If your take-home pay is $400 a month:

                   $400 x 10% = $40

• Your total monthly debt payments shouldn’t total more than $40 per month.
• Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.