Do you know someone who lives a debt-free life? If so, you should congratulate them; they’re becoming the exception to the rule. Most of us carry some form of debt, be it student loans, car notes, mortgages, or credit card bills. The bad news is that it’s easy to get overrun by debt. The good news is that all debt is not created equal.

Debt gets out of hand when we have a too-high debt-to-income ratio. Mortgage bankers typically look for borrowers whose monthly long-term debt payments are equal to or lower than 36% of their gross monthly income. Any more than that could result in denial for loans.

If your debt is getting hard to shoulder, take a look at the things you’re buying. Some debt is good, and some is bad. Where does your spending fall?

Good Debt

We sometimes need things we can’t afford to pay for all at once. Big-ticket necessities like automobiles, homes, and education fall into the “good debt” category. If most of your debt is good, you’re handling your finances well. Just be sure not to overdo it. You should be able to make your monthly payments with a reasonable amount of wiggle room.

Bad Debt

Bad debt includes things we want rather than need. We purchase these items whether we can afford them or not, and often regret it when we’re still paying for them years later. Credit card debt is one example of bad debt. Since credit card balances incur high interest rates (not to mention stiff fees and penalties), it’s best not to use them to fund purchases you don’t really need, like vacations and impulse buys.

The Bottom Line

Separate your needs from your wants. If you really need to buy something that you can’t pay cash for, talk to your bank about a low-interest personal loan. Banks are typically easier to work with than credit card companies, especially if you’re a long-term account holder. Borrow only the amount you need to make the purchase.

Bonus: You can take out a personal loan to pay off your high-interest credit card debt. Then you’ll only need to make one monthly payment at a much lower rate of interest, saving yourself a lot of money (and stress) in the long run. And with all that interest-laden credit card debt off of your history, your credit score will improve – as long as you make timely repayments on your loan.

Have you noticed anything strange about your credit limits lately? They might be falling, and you don’t even have to be a bad customer to have your limit slashed. Lenders, including credit card issuers, aren’t willing to take substantial risks anymore — and if you’ve almost maxed out your credit cards, you might be considered a substantial risk.

Their solution to this problem is to lower your credit limit. If you happen to default on your debt, they’d rather have you default on $2,000 than $20,000. It’s all about minimizing the risk of bad debt.

Unfortunately, when your credit limits shrink, so does your credit score. A high debt-to-credit ratio is important, and lower credit limits mean a lower ratio.

To avoid losing your generous credit limits, take these 5 simple steps:

1.    Pay on time, every time. You’ll be considered a risky borrower if you’re even a day or two late with a payment. Stay on top of your credit card bills.

2.    Pay down your debt. Try to keep your debt at or below 25% of your total available credit — the ideal debt-to-credit ratio that most lenders look for.

3.   Stay informed. Watch your mail for letters warning you that your limit is about to be reduced. If you catch these in time, you might be able to get your card issuer to reconsider.

4.    Negotiate. If you can’t come to terms with your current card company, just pay down your debt and open another account with a card issuer who offers better terms.

5.    Know your rights. Credit card companies might reduce your limits if you’re employed in an industry that’s facing financial strain, such as home construction. Even marriage counseling or frequent trips to clubs can cause lenders to wonder if a divorce is imminent. Such lifestyle discrimination has led the FDIC to file a lawsuit against creditors who use people’s jobs and habits as an excuse to withhold credit.

Credit card companies have raised their standards. Fewer lines of credit are being approved, and even long-time customers are feeling the squeeze of lenders’ tightening purse strings. If you’ve always made your monthly payments on time, try to negotiate a higher limit with your credit card company. They’ll want to keep your business.

Even if you can’t get the terms you want, don’t stop using your cards altogether. Months of inactivity might cause the company to close your account, which will only hurt your debt-to-credit ratio. If you decide to apply for new cards, don’t close your old accounts right away. Remember: the more available credit you have, the better your credit score will be.

Living a life without debt is nothing more than a pipe dream for many Americans with the way the financial noose has been tightened around our necks. Rising oil prices, falling house prices, even cigarettes are starting to be taxed in some states at an alarming rate to make up for budget shortfalls. 

This all adds up to tough times for the majority who are struggling to forge ahead with their lives.  Good, hard working people are finding it difficult to not maintain a decent standard of living but to attain a decent standard of living in the first place.

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