Principles of Good Credit Management
From Financial Literacy Wiki
Principles of Good Credit Management
For money that you borrow from financial institutions, you will be charged with interest on your loan. The interest rate charge on these loans will be much higher that the interest earned from deposits. As you can see, it is costly to borrow, thus you should avoid excessive borrowing.
As a guide, here are a few basic principles you should follow, when you borrow from financial institutions.
- Ascertain that the purchases financed by borrowings are absolutely essential or profitable. For example, most people need a roof over their head and hence it is necessary to use loans to finance the purchase of a home. And also, if the return on an investment exceeds the interest cost, then it is wise to borrow to finance the investment.
- Verify that you have the means to repay the loan and that the loan repayment schedule fits into your monthly budget.
- Ensure that not more than 30% of your disposable income is used to service debts. Debts would include your mortgage repayment, property tax, mortgage insurance, car loans and credit card payments.
- Monitor the principal that is outstanding regularly. You need to ensure that the interest charges and the principal are reduced according to the loan amortization schedule.
