Personal Finance

How much credit is realistic to you?

Credits – loans, credit cards and other types of credits – are of convenient use for the customer in managing the finances better and as a helping hand during emergency situations. With credit you can pay for big expenses like a home or a car or a mortgage could facilitate your entry into a new house without requiring the entire cash to make the purchase. It can also be used as a tax reduction technique. But this is the useful and better side of credits.

On a flip side, mismanagement of credits can have a real negative effect on one’s financial condition and hence his/her credit rating.

Credit by itself is a big responsibility for the person who uses it. If used improperly, it can lead to unmanageable financial crisis and debts. So the million dollar question is “how much credit is realistic to you?” It is all about understanding credit, the tricks to manage it and to realize the warning signs when anything starts to go awry.

The best thing that can be done to control financial drain due to credit is to live within one’s means. It implies that the credit you apply for and the payments should be a function of earnings you have minus expenses. After all that will be the money you are using to pay back the credit (if have any). It is only wise to be within one’s limits than competing with others around in terms of material possessions.

To budget one’s finances is an important and intelligent step towards being realistic towards credit issues. By maintaining a stringent budget, one can make sure that the payment for a credit due is maintained without fail. Budgeting is essential owing to the fact that we all tend to spend a lot – sometimes in small amounts a number of times – unnecessarily, which otherwise can be avoided with little care.

Also, to maintain a decent credit score is essential for one’s financial future. Lenders generally offer small interest rates for a person with a good credit history while those with a poor credit record may need to shell out a percentage which can be 2-2.5 times that of a good credit counterpart. For example, a customer with a good payment history – with no late payments – are considered at a good credit risk and may enjoy a basic interest rate as low as 6% while those with a poor credit history may have to pay as high as 20%.

Also, think twice before you co-sign a loan for a person with a poor credit history. If the other person defaults the payments, you as the person for whom the loan has been sanctioned will come in the firing line first.

The calculation of how much credit is realistic to you is entirely based on one’s earning and expense ratio. If one could maintain it within limits, things will be lot easier to handle. As mentioned earlier, credit is a big responsibility and its effect on one’s finances depends on how the entire thing is handled. In short, it is all about planning, budgeting and yes, being sensible.