The sensible use of debt should be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach. Borrowing can also have an ugly side. Too much, too expensive or the wrong kinds of debt can make life miserable. Developing good borrowing habits early can help you avoid a lot of anguish later.
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.70-293 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.
Common sense borrowing habits.
- Never borrow what you cannot repay.
- Never borrow for a luxury if you cannot afford the necessities.
- Prioritize your borrowing.
- 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 on all your borrowing. Comparing credit cards can be confusing. 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 and you can 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.
Prioritize borrowing based on long-term value
- College educations
- True necessities
- Major furniture purchases
- Expensive jewelry
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.70-292