Fundamentals of Borrowing

The sensible use of debt should be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach. Borrowing can also have an ugly side. Too much, too expensive or the wrong kinds of debt can make life miserable. Developing good borrowing habits early can help you avoid a lot of anguish later.

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 to borrow 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 an 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.

It is important to make sure your credit report is accurate and up to date. A new program enables you to receive a free credit report once a year. You can get this free report by using the website www.annualcreditreport.com. You can also get copies by calling the credit agencies, but there may be a small charge unless you have recently been denied credit.

• TransUnion − 800/888-4213
• Experian − 888/397-3742
• Equifax − 800/997-2493

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 on all your borrowing

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 and you can focus on any annual fee and benefits such as airline miles or cash back features. 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 rise if interest rates rise. Long-term mortgages usually lock in a higher rate. If you expect to stay in your current home 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

1. College educations
2. Housing
3. True necessities
4. Autos
5. Major furniture purchases
6. Vacations
7. 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.