Developing and Using a Wise Borrowing Strategy

The sensible use of debt should be part of any sound financial strategy. Debt enables you to enjoy things that otherwise are beyond your current reach, but it can also have an 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 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

Most lenders use your credit record to determine credit limits and what rates to charge. A good credit record will make future credit approvals easier and save money with lower rates. 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.

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 cut them up. 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 reflects 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 or cash back features. If you carry over balances, the interest rate should be a top concern.

The "right mortgage" for you should also match your needs. Adjustable rate mortgages usually have lower rates than fixed rate mortgages, but your payments may rise. If you expect to stay in you 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.