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Developing
and Using a Wise Borrowing Strategy
The sensible use of
debt should be part of any sound financial strategy. Debt can enable you
to enjoy things that otherwise are beyond your current reach. Borrowing
can also have its ugly side. Too much, too expensive or the wrong kinds
of debt can make life miserable.
The basics
Borrowing costs money. That is not necessarily bad. It just means
that when you pay it back, you have to pay more than you borrowed. The
components of a good debt strategy are quite simple:
- Choose when and
what to borrow for carefully.
- Find the best interest
rate and terms, based on your needs and wants.
- Live up to your
repayment responsibilities.
- Periodically review
your debt. Refinancing your mortgage or auto loan may save you money.
The importance
of a good credit record
A good credit record does more than just make future credit approval easier
to get. Most lenders use your credit record to determine credit limits
and what rates to charge. A good credit record will save you money. A
program enables you to get a free credit report once a year so you can
know your own credit record. You can request your free report at the website
- www.annualcreditreport.com. Otherwise you can order a report from one
of the three large credit reporting agencies.
| Order
your credit report
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| Equifax
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800/685-1111
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| Experian
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888/397-3742
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| TransUnion
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800/888-4213
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Common
sense borrowing habits
- Never borrow what
you cannot repay.
- Never borrow for
a luxury if you cannot afford the necessities.
- Prioritize your
borrowing.
- Reserve some borrowing
capacity for emergencies.
Getting help if
needed
Take action immediately if your borrowing is getting out of control. If
credit cards are the problem, stop using them or even cut them up. Contact
lenders to develop a workable repayment plan. A qualified credit counselor
can help.
Consider all the
terms
Comparing credit cards can be confusing. You have to consider interest
rates, fees and associated benefits. The right card for you should reflect
how you use it. If you pay the full balance monthly, the interest rate
is of little concern. Focus on any annual fee and benefits such as airline
miles. If you carry over balances, the interest rate should be a top concern.
The "right mortgage"
for you should balance interest rate, length, and down payment requirements
that fit your situation. Adjustable rate mortgages usually have lower
rates, but your payments may increase. Long-term mortgages usually lock
a higher rate. If you expect to stay in one location only a few years,
an adjustable rate mortgage may be best. If an increase in monthly payments
would be too painful, look at a fixed rate mortgage or an adjustable one
with rate adjustment limits.
Prioritize borrowing
based on long-term value
- College educations
- Housing
- True necessities
- Autos
- Major Furniture
purchases
- Vacations
- Expensive jewelry
rarely worn
Summary
Being conservative
in your use of borrowing can help you take control of your financial future.
Borrowing for the right reasons and living up to your repayment responsibilities
can make borrowing a useful financial tool.
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