Your debt

8 benchmarks for borrowing

Those who are financially well off might be tempted to turn the page. Don't. Debt problems can stalk anyone, especially in a slowing economy. "We have doctors, lawyers, and stock brokers on debt-management plans," says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.


WARNING SIGNS

You know the signs of excess debt: You rely on credit cards or home-equity credit lines for everyday purchases, you make only minimum payments, you take cash advances from one credit source to pay others. Avoid that fate by heeding these rules for smart borrowing:

20%

Add your monthly car payment, the average new charges on your credit cards, and other non-mortgage debt payments. The total should be no more than 20 percent of your gross monthly income.

28%

Your monthly mortgage payment (including property taxes and insurance) shouldn't exceed 28 percent of your gross monthly income.

36%-48%

Ideally, your total monthly debt payments shouldn't exceed 36 percent of your gross monthly income. But, Jones says, many people go above 48 percent, which should be avoided if possible.

80%

The total amount borrowed on your first mortgage, plus any second mortgage or home-equity credit line, shouldn't be more than 80 percent of the property's value. The lower this debt-to-equity ratio, the better.

6 pts.

Low introductory interest rates make adjustable-rate mortgages look affordable. Most ARMs come with a lifetime rate cap of 6 percentage points. If you're considering an ARM, add 6 percentage points to the teaser rate, then calculate the monthly payments under the higher rate. That's your worst-case scenario; if the result (with taxes and insurance) exceeds 28 percent of gross monthly income, dump this deal.

6 mo.

You should have enough money to cover six months of living expenses in an accessible account for emergencies. Don't use credit lines as a substitute.

36 mo.

Don't take out an auto loan that exceeds three years. Longer-term loans can leave you "upside-down" with a loan balance that's larger than the car's depreciated value.

650-700 pts.

You're generally considered a subprime borrower if your FICO credit score is below 600 for auto loans and mortgages and below 700 for premium credit cards and 650 for classic cards, says John Ulzheimer, president of consumer education for Credit.com, a loan information and referral Web site. If your credit score falls below those thresholds, you'll pay higher interest rates.


HOW TO DIG OUT

Assess your finances. Tote up your debts and develop a plan for paying them off. Generally, you'll want to pay off your highest-cost debt as quickly as you can.

Stop borrowing. Use only one credit card regularly and pay the full balance each month. Pay for your daily expenses in cash or use a debit card. Keep a second credit card at home as a backup in case of theft or fraud.

Call creditors before they call you. Don't ignore staggering debt. Arrange a payment plan sooner rather than later.