Good Credit: The Importance Of Responsible Borrowing

Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, where and when to invest, how and when to even borrow responsibly.

Loans are a convenient way to grow your dreams however, when you take out a loan you are obligated to meet certain repayment conditions that could negatively impact you at personal or business level if you aren’t careful. Good debts include those that it is impossible to pay cash for including building a house, buying a car, education for one’s children and others. Bad debts, on the other hand, are those that are not essential such as borrowing money to go on holiday, to celebrate a birthday and to splurge on a new wardrobe.

The purpose of financial planning can never be exhaustively explained. Some of the issues that you should understand in personal finance include: how to create and stick to a budget, timely payment of bills, managing loans, understanding the type of, and terms and conditions of your loan and responsible borrowing.

The Financial Services Regulatory Authority, in its consumer education platform notes that borrowing money to buy a home is considered a good decision provided you are able to pay the mortgage instalments comfortably.

Additionally, FSRA notes when you borrow money to pay for education, whether for a child or for yourself, you are investing in your future earning ability.

“Borrowing money when you are faced with an emergency may be a good decision depending on the nature and magnitude of the emergency. The fact of the matter still remains that people borrow money because they don’t have the cash to purchase whatever they want to purchase; as a result they resort to borrowing. Without understanding and discipline, borrowing can be a habit most people fail to get rid of. Whilst you may have an immediate need to address using a loan the loan itself could be a long term commitment. Impulse borrowing may be a recipe for your long-term financial woes,” the Authority advises.

Having a few debts is not a problem. Being overly in debt, however, is dangerous to your future finances. It’s vital to be able to manage one’s debts in a way that guarantees no harm is done to your future’s financial stability. It is also very important for consumers to understand basic Debt Management Skills.

According to DebtSolve Director and Debt Counsellor Thatcher Maziya, everyone with even a little bit of debt has to manage their debt.

“If you just have a little debt, you have to keep up your payments and make sure it doesn’t get out of control. On the other hand, when you have a large amount of debt, you have to put more effort into paying off your debt while juggling payments on the debts you’re not currently paying,” she says.

She says it is important to make a list of your debts, including the creditor, total amount of the debt, monthly payment, and due date. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. She advises that you don’t just create your list and forget about it but refer to it periodically, especially as you pay bills.

Maziya says late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row and your interest rate and finance charges will increase.

“If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt but, it keeps your debt from growing and keeps your account in good standing. When you miss payments, it gets harder to catch up and eventually your accounts could go into default, “she says.

She highlights that having some debt isn’t necessarily bad, but having excessive debt is.

“Having worked closely with over-indebted consumers we have come to realize that the problem emanates from lack of financial education, personal finance management to be precise. Most often than not consumers will tell you that they do not know anything about personal finance. Responsible borrowing requires understanding personal finances and remedies available for consumers who may find themselves already overly indebted. It must be noted that we also regard the debt review process as a last resort yet very a useful measure to ensure that consumers pay-off their debt and meet their basic living expenses successfully,” Maziya says.