The sensible use of debt should be part of any sound financial strategy. Debt can enable you to enjoy things that otherwise are beyond your current reach, but borrowing can also have its ugly side. Too much debt, the wrong kinds of debt or debt that is too expensive can make life miserable.
The basics
Borrowing costs money. That’s 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 carefully when to borrow.
- Find the best interest rate and terms, based on your needs and wants.
- Live up to your repayment responsibilities.
- Periodically review your debt.
- Consider refinancing your mortgage or an auto loan.
The importance of a good credit report
A good credit report does more than just make future credit approval easier to get. Most lenders use your credit report to determine credit limits and what rates to charge, and a good credit report will typically save you money. Request your free report once a year from http://www.annualcreditreport.com/ to monitor the activity on your report. You can also request a report directly from one of the three major credit reporting agencies listed below.
- TransUnion: 800-888-4213
- Experian: 888-397-3742
- Equifax: 800-997-2493
Consider the terms
Comparing credit card terms can be confusing. You have to consider interest rates, fees and associated benefits. The right credit card for you should reflect how you use it. If you pay the full balance every month, 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. [Gratuitous plug: The First Internet Bank Cashback card pays 3% cash back on gas transactions and 1% back on all other purchases.]
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 increase. Long-term, fixed 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 the best option. 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 goals
- College education
- Housing
- True necessities
- Autos
- Major furniture purchases
- Vacations
- Expensive jewelry rarely worn
Common sense borrowing habits
- Never borrow more than you can repay.
- Never borrow for a luxury item if you cannot afford the necessities.
- Prioritize your borrowing.
- Reserve some borrowing capacity for emergencies.
Get help, if needed
Take action immediately if your borrowing is getting out of control (or is already an issue). If credit cards are the problem, stop using them or even cut them up. Contact lenders to develop a workable repayment plan, or a qualified credit counselor can also help.
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.
