Credit card debt can be a tricky thing to manage successfully in your budget. As credit card debts are revolving, the amount you are required to pay each month increases along with your balances. If you make a number of charges in a given month on one of your credit cards, you can expect the bill to be higher the next month. This can make credit card debt payments problematic to manage in your budget, because there is no set cost you can plan around. As a result, many consumers end up in financial hardship simply because their credit card debt got out of control.
With so much economic uncertainty in the world right now, the last thing you need is to be worrying about whether your credit card debt is under control - especially when there are so many easy ways to monitor credit card debt and make sure it is in balance with your budget. With careful monitoring of the debt, you can help ensure your own financial stability regardless of what financial markets do around the world.
The first ratio you need to track is your personal debt-to-income ratio. This compares your total monthly debt payments to your total monthly income. You divide your total obligations, including: mortgage payments, car payments, student loan payments, credit card debt payments, insurance and your utilities. By adding in the utilities, you can effectively tell how much available cash flow you have each month once all your obligations are paid. Ideally, you want your ratio to be less than 36 per cent. This indicates your monthly obligations are in balance with your income earning level.
The second ratio you can monitor focuses specifically on your credit card debt. Ideally, paying off your credit card debt every month and maintaining zero balances is the best and most cost-efficient way of using credit. However, many Canadians find maintaining zero balances to be difficult. If you need to carry some credit card debt, the monthly payments on that debt should not exceed more than ten per cent of your income. If they are more than that, there is a good chance that your debt-to-income ratio is higher than it needs to be. In addition, you may be struggling to cover all of your expenses and are unlikely to have money left over each month for savings.
If your credit card debt is higher than ten per cent or your debt-to-income ratio is higher than desired, reducing credit card debt is a good way to get back on track and ensure financial stability. Streamline your budget to free up as much cash as possible and direct all available cash flow to paying off one debt at a time while paying the minimum requirements on all your other obligations. Each credit card debt you eliminate will free up additional cash in your budget and ensure you have a healthy amount of debt for your income.
Connie Solidad has been writing about finances and debt consolidation loans for years. She's an expert in the industry and writes about credit counseling and debt management options. When Connie is not working, she loves playing with her two dogs in Tampa, Florida.