Wednesday, 4 Jun 2008

Benchmarks for Borrowing

High Jump 3
Creative Commons License photo credit: »Philo

Consumer Reports published an article on the eight benchmarks of borrowing.  I must say that I don’t agree with all of their benchmarks.  For example, they state that non-mortgage debt (i.e. auto loans, credit cards, etc.) shouldn’t be more than 20% of your gross income.  If a person has a gross income of $45K (close to the US median), that’s $750/mo.  That’s definitely a bit bunch and an indicator that you’re probably living above your means.

The article also lists 28% for mortgage payments (PITI) which I feel is reasonable.  However if you’re spending 20% on non-mortgage debt, 28% on your mortgage, 25% on income tax, you can see where this is headed.  Not much left to pay other bills or save.

Last but not least, they give a benchmark of 650-700 for your FICO.  I consider 650 average at best.  700 is a much better bar to set.  Once you reach that level, you’ll be able to obtain the best rates for loans and credit cards (though I hope you won’t carry a balance).

How do you compare to Consumer Reports’ benchmarks?


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