Cultivating a Good Borrowing Strategy
Developing a Wise Borrowing Plan
Debt can be a part of any sensible, sound financial strategy. Debt can enable anyone to enjoy things that otherwise are beyond our current reach. Borrowing can also have an ugly side - too much, too expensive or the wrong kinds can make life uncomfortable. Borrowing for the right reasons and living up to your repayment responsibilities can make borrowing a valuable financial tool.
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 - base them on your needs and wants.
- Always live up to your repayment responsibilities.
- Periodically review your debt - there are often possibilities that refinancing may save you money.
The importance of a good credit record
Lenders use your credit record to determine rates and credit limits.
A new government sponsored program enables you to get a free credit report once a year. 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:
- Equifax - 800-997-2493
- Experian - 888-397-3742
- TransUnion - 800-888-4213
Common sense borrowing habits
- Prioritize your borrowing.
- Reserve some borrowing capacity for emergencies.
- Never borrow what you can't repay.
- Never borrow for a luxury if you can't afford the necessities.
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.
Prioritize borrowing based on their long-term value to you:
- College Education
- Major Furniture purchases
- Luxury items - Expensive jewelry, art, or clothing
Consider all the terms
Credit card offers can be confusing and complicated - varying interest rates, cash back and rewards, fees and other benefits. Your credit card choices should reflect how you use it.
Paying the full balance monthly - the interest rate is of little concern. Focus on annual fee and benefits such as cash back, points and airline miles.
Carrying over balances - the interest rate should be a top concern.
The "right mortgage" should be a balance of interest rate, length, and down payment requirements that fit your situation. Adjustable rate mortgages usually have lower rates, but your payments may rise. Long-term mortgages usually lock a higher rate but with fixed payments.
Staying in one location only a few years? An adjustable rate mortgage may be best.
Would monthly payment increases be too painful? Look at a fixed rate mortgage.