Credit – How Much Can You Afford?
The use of credit often seems very easy – in some cases, too easy – for the young family which needs many things and cannot afford them all at once.
Easy credit! Quick credit! Nothing down, only a few dollars a week! Walk in, walk out with cash! All these slogans can become very enticing. They make it difficult for some families to make a sensible decision about the kind and amount of credit they can afford to use.
You can afford credit only if you are buying things which a person with your income can reasonably afford. If you are a family of five, earning $850 a week, for example, you cannot reasonably afford a $46,000 car, no matter how easy the credit is.
You can afford to use credit only for those things which make a real contribution to your family life and to your own family values.
You can afford credit only if you are spending less each month than you make. You must have a surplus of income over living expenses out of which to make monthly payments.
Here is a convenient way of figuring out how much credit you can afford. Suppose your job pays you $4500 per month.
As you know all too well, you never see that full amount. Before you get your paycheck, certain deductions are made: your income tax, social security payments, perhaps your union dues, and other authorized deductions.
What you actually get – your take-home pay – might then be $3720.
There are certain necessities which must be provided for before you think of getting anything new, either through cash or credit. These include rent, food, clothing and transportation. By the time you have allowed for them, you have perhaps $1400 left.
Then you may have some $250 due on charge accounts, revolving credit accounts or other 30-day credit payments. And you may already be making payments for cash you borrowed or for things you bought on credit in the past – monthly payments of $350 on your car, for instance. You must allow for these payments too, before you plan any additional spending. Suppose those payments leave you with $800.
In addition to the necessities and previous credit bills you must allow for, there are other things you ought to allow for, things which should have priority over any new purchases. These include savings, insurance, medical care, contributions to church and charity, and something extra for recreation. By the time these things are taken care of, your month’s supply of money may be reduced to $50.
Now, if there is still something you want and feel you are justified in buying you can afford to buy it on credit only if you do not obligate yourself for new monthly payments that are more than $50.
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