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Lesson_5 - Establishing Your Debt Limit FSoS 1301 Cash or...

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1 Establishing Your Debt Limit FSoS 1301: Cash or Credit: You Need to Know Lesson 5 Required Readings for Lesson 5: Jason. (2011, March 31). What is your personal debt ceiling? [Weblog]. Retrieved from http://frugaldad.com/2011/ 03/31/your-personal-debt-ceiling/? Read entire article. Shapiro, A. (Co-host) (2008, July 3). Why we spend more using credit versus cash. National Public Radio. Episode retrieved from http://www.npr.org/templates/ story/story.php?storyId=92178034 Listen to entire audio clip. Optional Readings for Lesson 5: Prochaska-Cue, K. (1991, November). Setting reasonable debt limits. Retrieved from University of Nebraska-Lincoln, University extension website: http://digitalcommons. unl.edu/extensionhist/612 Read entire article.
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2 Learning Objectives Comprehend the importance of establishing your debt limit. Recognize the role of financial guidelines. Know what income guidelines and financial ratios miss in establishing debt limits. Identify your personal financial perspective. Learn how to avoid the inadvertent growth of debt. Name the factors involved in defining a debt limit. Lesson 5 By the end of this lesson, you should: Comprehend the importance of establishing your debt limit. Recognize the role of financial guidelines. Know what income guidelines and financial ratios miss in establishing debt limits. Identify your personal financial perspective. Learn how to avoid the inadvertent growth of debt. Name the factors involved in defining a debt limit.
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3 Importance of Establishing Your Debt Limit Financial well-being and success result. Creditors cannot be trusted. A debt limit ensures the individual stays in balance. Income distribution 10-70-20 Debt-to-income ratio Lesson 5 Acknowledge the Need of a Debt Limit: It is important to understand that establishing a debt limit will lead to financial well- being and success. The absence of a debt limit, in many cases, leads to unmanageable levels of debt. Monthly payments can quickly equal or exceed available income. However, in establishing your debt limit, you are able to manage your spending behaviors. In addition, you are able to differentiate your purchases as “needs” or “wants.” Creditors Cannot Always be Trusted: Some individuals believe that if creditors continue to offer or increase their credit limit, they must be able to afford it. In recent years, the number of lenders has greatly increased. Not only do banks issue major credit cards, but stores, college alumni associations, sports teams and other organizations also offer major credit cards bearing their logo alongside the Visa or Mastercard emblem. This proliferation of lenders puts pressure on each company to find new customers. As a result, many lenders expect that a certain percentage of their accounts will not be collectable. Although the default of an account is merely a business expense to a lender, to an individual, it can mean the ruin to their financial future. Not being able to pay on an account can negatively impact the individual’s credit report.
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