Developing and using a wise borrowing strategy
Debt can be a positive part of your financial strategy if used appropriately. Learn the basics of borrowing to contribute to a healthy financial life.
The basics of borrowing
Borrowing costs money, which isn't 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 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.
Good borrowing habits
Developing good borrowing habits early in life can help you avoid a lot of anguish later. Principles that make up good borrowing habits include:
- Never borrow what you cannot repay
- Never borrow for a luxury if you cannot afford the necessities
- Prioritize your borrowing based on long-term value
- Reserve some borrowing capacity for emergencies
The importance of a good credit history
A good credit history does more than just make future credit approval easier to obtain. Most lenders use your credit history to determine credit limits and what rates to charge. A good credit history will save you money. Some websites enable you to get a free credit history once a year so you can know your own credit history. You can request your free history at AnnualCreditReport.com (opens in a new tab). Otherwise, for a small fee you can order a report from one of the three large credit reporting agencies.
The terms of borrowing
It's important to understand all of the loan terms when you borrow money.
When comparing credit cards, 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. Focus on any annual fee and benefits such as rewards (air travel 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 to fit your situation. Adjustable rate mortgages usually have lower rates, but your payments may increase. 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.
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, and know that a qualified credit counselor can help.
The bottom line
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.
Interested in a credit card?
How do I build credit?
Establishing credit is the first step toward future life purchases such as a house or car.
Build a solid credit history
With a solid credit history, you can get credit when you need it and borrow at the lowest possible rates.
Getting out of debt
The road to a debt-free future begins with a solid plan.