You may have set out by your debt-to-income ratio for how much you can borrow, but do you have a debt ceiling? That’s a different thing altogether, as a debt ceiling is self-imposed. How much debt are you comfortable with? It shouldn’t be the absolute max amount that you are allowed to borrow.
“Adopting a mindset of maxing out debt, simply because it is available to you will virtually ensure that you will never be debt-free. If you are using debt to cover expenses or for impulse purchases than you are consistently spending beyond your means. The debt cycle will continue to churn,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“Instead, take control over your debt by establishing parameters around both what is acceptable use and an acceptable amount, as your budget permits, ” says Schwartz.
Lowering your personal debt ceiling is an important step in taking ownership of your debt, which will in turn help you get your life back. Remember, you are in charge of your debt – not the other way around.
When do you use credit?
What have you been turning to debt for? It is a matter of convenience, or are you turning to debt to cover costs because you run out of money every month? Do you have a budget to help you manage expenses? That might be the problem right there. Setting a budget will help you anticipate costs and spend within your means.
When is it ok to use debt?
What is your comfort level with debt? Do you turn to your credit card easily? To reduce your debt use, you can perhaps put your cards away to use for emergencies only. However, if you’ve got a proper budget in place, you should be able to put a little money away every month in an emergency fund, which means that you can leave your credit card in your wallet. You’ll have cash on hand for emergencies too.
Can you picture your life without debt?
Have you simply accepted debt as a means to an end and expect that it will be part of your life forever? It doesn’t have to be.
Have you envisioned your life without debt? If you are used to the immediate gratification of credit use, it may feel like a sacrifice to forgo a purchase. However, committing to lowering your debt ceiling is an important first step that could help you become debt-free. With the extra cash flow available to you after your debt is paid, you’ll be able to spend more freely- without building up debt.
Lower that debt ceiling one step at a time
Once you’ve committed to changing the direction of the debt cycle, you need to devise a plan to pay down debt and lower your ceiling simultaneously.
First, switch to cash only. You can only bring your personal debt ceiling down if you keep it from getting high again. Second, pick your debts. Start with your highest interest bearing card and put down as much as you can. Another trick is to start with your lowest balance card because it will be paid off more quickly, giving you the encouragement to keep on going.
To maximize your debt repayment efforts, track all of your spending. It helps you stay accountable to your budget.