How to Measure & Manage Credit Risk

Measuring and managing your credit can help you avoid financial ruin. Having too much credit available to you--or carrying too much debt--can be dangerous. Large credit lines can lead to impulse spending for luxury items you might not buy if you had to pay cash. People who max out their credit lines when times are good can suddenly find themselves struggling to avoid bankruptcy after a job loss or major illness. Managing your credit properly can help you avoid spending too much.

Instructions

1

Calculate the total amount of your revolving credit lines. Credit cards and lines of credit are examples of revolving credit. Gather billing statements for these accounts to determine if your income can support the credit lines. According to the website Bankrate, your total credit lines should not exceed 20 percent of your household income. That means a family with a gross household income of $90,000 should have only $18,000 in revolving credit lines. That might be tough to do if you have a home equity line of credit, which often feature credit lines of $50,000 or more, depending on how much equity you have in your home. However, you should try to remain under the 20 percent threshold for all your other revolving lines of credit.

2

Check your billing statements to determine how much credit you are using. According to Bankrate, you should use no more than 30 percent of your credit lines at any time. For example, if your credit lines total $12,000, then you should not carry balances totaling more than $4.600. The more credit you use above the 30 percent threshold the greater the financial risk.

3

Determine how much money you have in your savings accounts. The less money you have in savings, the greater the risk of you incurring excessive debt after a job layoff or major illness. Suze Orman, a nationally recognized expert on personal finances, recommends that you have at least eight months of pay put aside for emergencies. Some people who lose their jobs are forced to rely on credit for living expenses because they have little money in savings. The result is often a mountain of debt that could take years to repay.