Borrowing money is not bad. In fact, it is unfair to put all the blame on this financial transaction for all the bad things that you are going through right now. The truth is, debt becomes a problem because we do not know how to handle it. Credit makes our lives difficult because of our own financial choices.
Having mentioned that, it is important for you to realize that it is okay to borrow money. There are several instances when borrowing is actually the best way that you can improve your financial life. But to make it work, you have to understand that there are rules that you have to follow. Credit management is very important because it will help you enjoy the benefits of the loan without letting it compromise your financial situation.
The reality is, we live in a society where debt is a common practice. In the past, it was taboo and lenders are perceived to be illegal businessmen. Now, it is even advertised on TV. In fact, if you use credit cards, it is like a status symbol. People who use their credit cards are deemed to live an affluent life.
According to the data published on USNews.com, American consumers increased their borrowing in January of this year. The data revealed that the borrowing is at the slowest rate compared to the past three year – but it is still increasing. The borrowing of consumers rose by $10.5 billion – a mere 3.58%.
Regardless of the growth, one thing is for certain, people will continue to borrow money and will keep on doing it unless they are faced with a financial crisis.
10 important rules when you borrow money
As mentioned, borrowing money is okay. But you have to understand and abide by the rules that will keep you from abusing it. Sometimes, people abuse the use of debt – that is the very thing that destroys their financial position.
If you want to continue using debt and at the same time, protect your finances from ruin, it is important that you follow the 10 commandments of borrowing money.
- You should have a good reason to borrow money.
The first commandment is to have a good reason to borrow money. There are good and bad debts. You have to make sure that the debt you will apply for will put money in your pocket. For instance, a loan that will help you start a business so you can earn more – that is a good debt. However, if the debt is something that will just take from your pocket – this is something that you need to consider carefully.
- You should know how you will pay it back.
The second commandment is knowing how you will pay it back. If you have no idea how to where you will get the money to pay the loan, then do not proceed with it. You will only make things worse if you cannot repay the debt that you will borrow.
- You should understand the terms of the loan.
The third commandment stresses the importance of the terms and conditions stated in the loan contract. Not knowing what you are getting yourself into is the first step towards a bigger problem. This ignorance is what caused the massive student loan problem in the country. According to LendEdu.com, 9 out of 10 student borrowers do not know the difference between a subsidized and unsubsidized federal loan. 97.9% of the respondents in the same survey said that they do not know which loans accumulate interest while they are in school or even during deferment. If you do not understand the debt, how can you repay it smartly? Before you borrow money, make sure you understand the conditions and stipulations in your loan contract.
- You should research the different options that you have.
The fourth commandment is all about knowing your options. There are various lenders and creditors out there. There are also various loan types. You have to know which loan you should borrow and the financial institution that you will borrow it from. You need to know which loan will give you the lowest interest rate and the best repayment term.
- You should always pay on or before the due date.
The fifth commandment touches on the importance of a good payment behavior. This is a huge consideration in your credit score calculation. When you make late payments, you are penalized for it. You will pay more than what is necessary.
- You should commit to your payment plan.
The sixth commandment is all about your commitment to pay off your loan. Sometimes, we create payment plans but we fail to follow through. Your plan will be for nothing if you cannot implement it. Create a realistic plan so implementation will not be too difficult to commit to.
- You should stop borrowing money until you have paid off the last.
The seventh commandment stresses the importance of keeping your debt levels low. Borrowing money in excess can be a problem especially if it will compromise your ability to pay it all off in the future. Keep your debt balance low so it will not be difficult to pay them all off even if a financial crisis looms on the horizon.
- You should never run away from your credit obligation.
The eighth commandment is the worst thing that you can do towards your debt. You should never ignore it. Although the debt may be big and intimidating, you need to face it now. Do not delay because the longer you wait, the bigger the problem will get.
- You should keep an eye on your credit activities.
The ninth commandment is all about credit monitoring. Make sure you know your credit activities because you may already be a victim of identity theft without you knowing it. According to a study done by ACAInternational.org, most Americans do not understand their credit scores. In fact, the majority are not monitoring their score. This is dangerous because people may already be using your identity to steal money and you are unaware of it.
- You should seek help when it is necessary.
The tenth and final commandment is learning when it is time to seek professional help. There are a lot of financial experts who are willing to lend their expertise to help you manage your credit and finances. If you do not have the time and ability to fix your debt situation, you need to seek help and you need to do it fast. Just make sure you learn how to find the right professional that is both reliable and trustworthy.
Borrowing money can benefit your finances but you need to obey these 10 commandments. Failing to do so can lead to pitfalls that you do not want to encounter.
2 consequences of disobeying the borrowing rules
If you disobey any of the rules mentioned above, there are two aspects of your financial life that could be ruined.
Your credit reputation
The first consequence will involve your credit reputation. Having a bad credit history will keep you from enjoying certain financial opportunities. For instance, if you need to get a business loan, a bad credit history will keep you from enjoying a low-interest rate on that loan. This can even affect your ability to partner with reputable establishments and companies. There are small mistakes that could be costing you a good credit history. Make sure to prevent them from happening so you can maintain a healthy credit report.
Your financial stability
The second consequence of disobeying the rules of borrowing money is the destruction of your financial stability. If you borrow too much money, for instance, and you run into an expensive emergency, you might be forced to stop paying your debt so you can finance that unexpected expense. Think about how debt can compromise your financial future. Be sure to make smart decisions about your debt so you can secure your financial standing.
A lot of successful individuals can attest that borrowing money can be helpful in building one’s wealth. However, you need to understand completely how this can be done. Educate yourself and follow the rules. You will never go wrong by sticking to the best practices of credit management.