They take a loan to buy a home or a car or pay for a college education. They use a credit card to make smaller purchases, such as a washer and dryer, bedroom furniture, or school clothes for their children. Timely repayment of what they borrow strengthens their ability to borrow again in the future.
Borrowing responsibly means asking three questions before taking on additional debt:
- Is the product or service necessary?
- Is there a way to afford this purchase without borrowing money?
- If borrowing money is the only way to afford the purchase, am I getting the best deal I qualify for, including the lowest rate and the lowest fees?
Determining how much debt your household can support given its current income can help keep debt to manageable levels. And knowing all you can about the costs of using credit can help minimize the expenses of using debt to achieve your goals.
By planning your borrowing carefully, you'll find you can afford more of the things that are important to you while you protect yourself against owing more than you can easily afford to repay.
The form of credit you use at any given time depends on several factors, including the amount you want to borrow, the way you plan to use the money, and the schedule on which you repay what you owe.
Remember when you're comparing loans, to look at the APR, not just the interest rate. You can then determine which fees apply and how much they are.
When you're considering a loan, it's a good idea to learn all you can about the lending process, the different loan products available, the current interest rates and costs, and the terms and conditions that will apply.
Generally speaking, lenders make decisions about whether to grant loans and the rates they will charge for those loans based on a review of three specific areas of a loan applicant's financial situation. These areas are sometimes called the Three C's: credit, capacity, and collateral.
Finding the right lender can be as important as selecting a loan that benefits you and your family.
Having access to credit and using it responsibly can help you reach financial goals that may otherwise not be possible. Many consumers use credit to purchase a home or auto, start-up and run a small business, or help fund a college education.
Borrowing wisely means knowing the potential challenges you face when you use credit and how to resolve them.