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How much debt is considered reasonable to have?


Sophia
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I am a bit confused by this. I was told by someone from a bank that you should have a reasonable amount of debt, not excessive amounts. 

What the heck makes any level of debt reasonable? Is this referring to a certain number or percentage or am I not understand something here?

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Well there are some numbers the credit companies go by when looking at your risk profile. 

Short term credit facilities such as credit cards should not be utilized over 30%. If they are higher then that it signals a small short term cash flow problem. So if your credit limit is $10,000 try not to have balances over $3000. 

It is much like thinking about loan to value ratio on a house. If a house is worth $100,000 a bank is going to want the owner of the home to have some skin in the game so they are not going to want to carry more then $80,000 in a mortgage. As you pay down your mortgage your loan to value becomes better. If the house drops in value your loan to value can become worse. 

When thinking about credit it is never good to be overleveraged in a way that you can not find a path to repayment if things suddenly went sideways. 

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I think this is a very loose way of saying that debt = credit and having more "debts" = higher scores... This is assuming you are spending and borrowing within your means and making monthly payments on time every single month. 

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My personal view is to never have any debt, but this is only "technically". I think it's okay to have "debt" in the form of a credit card statement for the month, AS LONG AS YOU HAVE THE MONEY TO PAY IT OFF. Basically only temporary debt

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On 6/11/2021 at 10:07 PM, Kuro said:

My personal view is to never have any debt, but this is only "technically". I think it's okay to have "debt" in the form of a credit card statement for the month, AS LONG AS YOU HAVE THE MONEY TO PAY IT OFF. Basically only temporary debt

This is a great thing to practice. 

I have personally been debt free for a few years now and it is the most freeing experience. I know if everything went sideways I would be able to pick up a minimum wage job and support my family of 6. Just need to pay utilities, food, and property taxes. 

Now I do use debt in business at levels I feel comfortable with.  I consider this good debt though and the debt expense is a wash against profitability saving you on taxes while making sure you do not to pony up so much money up front. 

So in my personal life there is no personal debt. In my business life I use leverage safely as long as I never need to give it a personal guarantee. 

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