What’s The Right Amount Of Debt?

No ‘one-size-fits-all’ recommendation is possible when considering the right amount of debt to assume. But that doesn’t mean there are no good guidelines at all.

Naturally, credit card companies and other lenders are happy to make available as much money as they think their borrowers will repay. They take risks, but those are calculated risks. They look at default rates, current interest rates and carefully review credit history when they make loans. Borrowers can benefit by following some aspects of their strategy.

Before taking out new credit, consider the odds that you will have to default on repayment. Don’t factor in to your decision the possibility of deliberately defaulting or filing bankruptcy. You’ll find the consequences are rarely worth it and that should be reserved as a very last resort.

You can factor in expected increases in income – banks and other business do – but you should be very sure you’re actually going to receive it. A promised raise or hoped for income from a stock sale is far from guaranteed money.

Look at current interest rates and make a prediction about where they are headed, businesses do. That’s a very difficult thing to be confident about, but general trends are not random. Look at bonds, futures and other indicators. If 6% bond option prices are going down, many pros are betting interest rates will rise to above that in the future. These represent the bets of professionals about the future direction of inflation and interest rates.