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To prevent defaulting on a loan or credit card payments, it is important to use the credit wisely. The key to manage your credit wisely is knowing how much you can afford to borrow (Rules 1). You need to take a hard look at your current and future financial balance before taking up any new debt.

 Then Set a realistic budget…and stick to it!

A formula that I always use to calculate the debt ratio. The debt ration shows you how much I owe compared to how much I earn. It gives me a clear picture of my financial well-being.

 The lower my debt-ratio, the more I have left over to save or spend. You can calculate this on monthly basis or when come to the end of the financial year. It is calculated this way:

Example:

Monthly debt repayment = 2000 dollars

Monthly take home pay = 5000 dollars

The debt ratio = (2000/5000) X 100% = 40%

Experts recommend the no more than 15%-20% of your take home pay (excluding installment or mortgage) should be used to pay debts (loan and credit card payments). Furthermore, no more than 40% of your monthly take home pay should go to paying all debts, including installment and mortgage payments.

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