Developing and Using a Wise Borrowing Strategy

Using debt wisely should be part of any good financial plan. Debt allows you to enjoy things that might be out of reach now, but it can also have a dark side. Too much, too costly, or the wrong kinds of debt can make life difficult.

The basics

Borrowing costs money. That is not necessarily bad. It means that when you repay it, you must pay more than you borrowed. The components of a good debt strategy are quite simple:

• Choose when to borrow and what to borrow 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

Most lenders use your credit record to determine credit limits and the rates they will charge. A strong credit record makes future credit approvals easier and can help you save money with lower rates. A program allows you to get a free credit report once a year so you can know your own credit status. You can request your free report at the website – www.annualcreditreport.com. Alternatively, you can order a report from one of the three major credit reporting agencies.

Common sense borrowing habits

• Never borrow what you cannot repay.
• Never borrow for a luxury if you cannot afford the necessities.
• Prioritize your borrowing based on the long-term value of what you are buying.
• 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 cancel them. Contact lenders to develop a workable repayment plan. A qualified credit counselor can help.

Consider all the terms

Comparing credit cards’ interest rates, fees, and “rewards” can be confusing. Choose a card that matches how you use it. If you pay off the full balance each month, the interest rate matters little. Instead, focus on annual fees and benefits like airline miles or cash back. If you carry balances, then the interest rate should be your main concern.

The ideal mortgage for you should also fit your needs. Adjustable-rate mortgages generally have lower rates than fixed-rate mortgages, but your payments could increase. If you plan to stay in your home for only a few years, an adjustable-rate mortgage might be best. If a rise in monthly payments would be too difficult, consider a fixed-rate mortgage or an adjustable-rate mortgage with rate caps.