This was written in 2011, when the first talk of Debt Ceilings in the USA started. These days knowing your personal debt ceiling is important for different reasons. With increasing interest rates, the free-wheeling borrowing days of the 21st century are over.
How many folks know what their personal debt ceiling entails?
Why does this matter? It answers an interesting and important question: how far in debt can I put myself now (given that the potential to borrow seems infinite)? With increasing interest rates, borrowing is not as easy as ever.
How is it possible to calculate your personal debt ceiling? It’s not that complicated, so let’s just put together a quick heuristic on one way to do this calculation:
- Find each credit card you have, and add up all their credit limits, which could be a scary big number. We’ll call this value CC. Also, add up all the balances on your credit cards (we can use that for another useful calculation). Call this value CCO.
- If you own a house, what is the mortgage on it? Call that value MO, then determine how much you still owe on your mortgage. Call that value MOO. The problem might be you owe more than your home is worth? That is an issue.
- Do you have lines of credit or other similar credit vehicles? Find the limits on those, add them up and call them OCV, and of course, figure the amount you have on those vehicles becomes OCVO
So now the calculation becomes quite simple:
Personal Debt Ceiling = CC + MO + OCV
That is how much money (today) you can borrow if needed. However, you also need to calculate
Amount Owing on Debt = CCO + MOO + OCVO
This amount is important because the real interesting value is:
Actual Personal Debt Ceiling = Personal Debt Ceiling – Amount Owing on Debt
Conclusions on Your Debt Ceiling
If your entire ceiling is quite low, you are near the top and best work on lowering that debt. The other thing to note is that these values are living and can change daily. What changes can happen?
- It is possible to increase the credit limits on debt vehicles (much like our friends in the U.S. are trying to do).
- You can LOWER your credit limits, which causes your debt vehicle owners no end of headaches (you ever tried to lower your credit card limit, it is like you are about to commit a horrible crime that they try every which way to talk you out of it)
- Maybe incur more debt, by buying expensive things, like, groceries.
- Ultimately you can pay off debt and raise the ceiling by having less debt.