Consumer Debt
Developing defense

Proverbs says "The debtor is a slave to lender."

Consumer debt reached an all-time high 2008 at a high of $1,010.3 billion.

The good news is most families are reducing their debt and the bad news is the survey indicates debt is increasing once again.

According to Federal Reserve Statistics, consumer debt in 2002 was $713 billion and now is estimated to be $864.6 billion as of June 2012. It's down from the high but moving up again.

And this is only revolving debt. It does not include loans for cars, education, boats, etc., which may or not be revolving types of loans.

The real question is do you have too much debt.

If your "housing expense" is in line with the guidelines and you are not sure where you stand, there is a guideline for measuring that too!

You can use the total of your monthly payment from your Debt Repayment Schedule to find the answer to whether or not your debt is too high.

Once you know your total monthly obligation, you will need to calculate your net monthly income. That is how much you actually bring home after taxes and other deductions from your paycheck.

Now divide your total monthly payment by your net income. Your answer will be .00 (meaning you have no debt) or greater. Multiplying by 100 will give you a percentage.

If your answer is between .01 and .10 (between 1% and 10%) you are fine shape and really are not over using your credit. Keep up the good work.

If your answer is between .11 and .15, you should begin to take precautions when using your available credit.

Between .15 and .20 you are in the Red Zone, and are dangerously close to having too much consumer debt. Stop using credit and begin using a debt roll up plan to pay off your debt as quickly as possible.

Over .20 or 20% and you are in trouble and you probably know it already.

So, now that you know how to measure whether or not you have too much consumer debt, what can you do with the information?

First, if you are in the Red Zone you may not be able to make the payments on your credit card debt. This may not get better without help or a dramatic change.

It is time to your review your options.

Next, if you're not in the RED zone, examine your ratios before you commit to any new  debt, especially large purchases.

Suppose you are thinking of purchasing a large screen TV with a cost of $1,500 and your plan is to put it onto your credit card with an 18% interest rate.

For simplicity's sake assume your card charges simple interest (which it probably does not because credit cards use the "average daily balance" method and compound interest daily). Using simple interest, your monthly payment for the interest alone will be $22.50. In addition you have to remember that your card also requires some minimal principal generally between 1% and 5% of the balance. (You can find the information your card charges on your statement buried in the tiny print!) Let's use 1% for this example, making the payment $23.75.

Calculating your minimum payment by hand is complicated , so here is a link to a free calculator that may help you.

Add this amount to your debt repayment schedule and recalculate your consumer debt ratio.

If you are still in a safe area, good! If not you may want to delay or rethink your purchase. Also, remember, if you are only going to make the minimum payment required it will take years to pay off the balance.

Go back to Household Debt from Consumer Debt.

Go to Family Budgeting.