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The Fundamentals Of Borrowing – The Basics Of Good Debt Strategy

The basics
The basics of a good debt strategy are quite simple:

  • Choose when to borrow and what to purchase with credit carefully.
  • Find the best interest rate and terms.
  • Find a reputable lender you trust with excellent servicing capabilities.
  • Live up to your repayment responsibilities and clear debt as quickly as possible.
  • Review your debt periodically. This practice allows you to take advantage of timely opportunities to refinance your mortgage or an auto loan and could save you significant dollars.

The importance of a good credit record
Following these basic principles will allow you to establish and maintain a good credit record, which will do more than just make future credit approval easier. Most lenders also use your credit record to determine credit limits and what rates to charge. A good credit record could also save you money.

It is important to make sure your credit report is accurate and up to date. A new law enables you to receive a free credit report once a year from each agency. You can get this free report by logging onto the Website www.annualcreditreport.com. You can also get copies by calling the credit agencies listed below. 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
While laws regulating lending may be complicated, the principles that make up good borrowing habits are pretty simple and based on common sense.

  • Never borrow what you cannot repay.
  • Never borrow for a luxury when you cannot afford basic necessities.
  • Prioritize your borrowing.
  • Reserve some borrowing capacity for emergencies.

Getting help
If your debt gets out of control, take action immediately. Don’t assume that the problem will simply go away or resolve itself. Contact lenders before they call you to develop a workable repayment plan. A qualified credit counselor can also help.

Study all the terms on all your borrowing
What credit card is the right one for you? Comparing the various interest rates, fees and associated benefits can be confusing. The right credit card for you depends on how you use it.

If you pay the full balance monthly, the interest rate will be 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 or even if there is a chance that you might at some time carry over balances, the interest rate should be a top concern.

Home mortgages involve much longer term borrowing and represent the largest debt most of us will ever incur. The right mortgage for you should balance interest rate, the length of the mortgage, and down payment requirements to fit your situation.

Adjustable rate mortgages usually have lower initial rates, but payments may rise along with interest rates. Fixed-rate 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 better. If an increase in monthly payments would destroy your budget, look at a fixed rate mortgage or an adjustable one with rate adjustment limits.

Prioritize your borrowing
One way to prioritize your borrowing is to base it on the purchased items’ long-term value. For example, at the top of your list might be a college education for the children. Some would regard it as “priceless” with benefits that extend throughout a child’s entire lifetime. At the other end of the spectrum, expensive jewelry rarely worn might have very little value beyond its intrinsic one.

  1. Housing
  2. College education
  3. True necessities
  4. Autos
  5. Major furniture purchases
  6. Vacations
  7. Expensive jewelry rarely worn

Summary
If you are uncertain about whether you should borrow, a rule of thumb is to be conservative in your use of credit. Sensible borrowing can help you take control of your financial future. More importantly, it could prevent you from losing control of your financial future. Live within your means, but if you have to borrow, do so carefully and prudently.