This is a simple ratio that is calculated by adding up your fixed monthly debts, including rent or house payments, credit card bills, car payments and other credit payments, and then comparing it to your before-tax income. Utilities and groceries are usually not included in this figure. Many counselors will recommend a 20 percent debt-to-income ratio, but for many, this is simply not realistic, if for no other reason, for the high cost of housing.

Housing alone usually accounts for greater than 20 percent of one’s income. Thirty percent is quite acceptable, and most lenders will look favorably on such a ratio. If it’s greater than 30 percent, you’ll pay higher interest rates. If it goes higher than 40, you’re probably going to get turned down for any subsequent credit you apply for, and you’re going to be living a lot closer to the edge than is comfortable. 

Let’s take 33 percent as an acceptable medium for the time being, as this accounts for a third of your income. Suppose for example, you earn $3,000 a month, and your house payment, car payment, and other credit payments, not including your credit card payments yet, come to $900 a month. That’s 30 percent of your income. 33 percent of your income is $1,000, and so that leaves $100 a month that you can spend on credit card payments and still fall within the 33 percent figure. Now credit counselors will tell you that 33 percent is still too high, but it’s a workable and realistic starting point for many, and so that’s why we start with this figure. Getting it down further is of course, desirable.

Now just how much credit card debt can you carry? Keeping with the above example, you know that you can afford credit card payments of $100 a month. Assuming for example again, that you have a card that carries a 15 percent interest rate, you could carry a balance of about $4,000 and have a minimum payment of $100 a month, assuming that the minimum payment is 2.5 percent of the balance.

However, keep in mind that by making only the minimum payment, your debt will take a very long time to pay off, and you will end up paying a great deal of interest as it continues to compound every month. Therefore, we recommend paying at least double the minimum payment. Therefore, your maximum credit card balance should be no more than $2,000 in this case. Your minimum payment will be $50 a month, but you will instead pay $100 each month so that you can avoid excessive interest and pay the debt quicker.

Once you’ve arrived at these figures, managing your credit card spending gets a little easier. Before you make a purchase using your card, look at your balance—if you are already at $2,000, don’t do it. If you are at $1,900, then you can afford to spend that extra $100 for the stereo you wanted, or that special night out.

Obviously, when deciding when to use or not use a credit card, you must take into account what you’re using it for, but the more important deciding factor is the total balance you are running, whether you’re spending it on a necessity or just a fun night out on the town.