7 traits smart borrowers possess
By Dawn Papandrea
November 26, 2014
There are some personal finance experts who will tell you that there is no such thing as good debt.
However, if you manage your lines of credit wisely, you can use lending products to your advantage. Borrowing can entail a mortgage, an auto loan, a personal loan or credit cards.
Savvy borrowers know how to manage their debts while not getting in over their heads. They have great credit scores, pay their bills on time and turn their borrowing to their advantage. How do they do it?
We asked experts that question. Here are the seven traits our experts said smart borrowers possess:
1. Smart borrowers know what their debt is costing them. Often, people pay their monthly bills without taking a close look at the role that interest plays in what they owe. “It's important to look at interest rates and how many years it will take you to pay off a balance, and what is that going to cost you over the lifetime of the debt,” says David Bach, vice chairman of Edelman Financial and founder of FinishRich.com. Once you know, you're in a position to make better borrowing decisions, and find the most favorable rates and terms for your needs.
2. Smart borrowers read the fine print. It's very easy to end up in a borrowing situation that you didn't realize you signed up for, says Kathleen Burns Kingsbury, wealth psychology expert and author of “How to Give Financial Advice to Couples.”
“Be careful of the psychological games that creditors play in order to entice you to take a loan or do a payment plan that is more beneficial to them than it is to you,” Kingsbury says. For instance, a seven-year car loan might have smaller payments than a five-year loan, but you'll pay more in interest in the long run.
“The person who negotiates is going to get a better deal.”
–David Bach, FinishRich.com
There's no “right” way to borrow, adds Kingsbury, as long as you understand what you're getting into. And if you don't? Ask for clarification. “There are no stupid questions, and you have every right to ask the lender to explain [the terms] in such a way that it makes sense to you,” she says. Otherwise, it's a signal that you should choose a different lender.
3. Smart borrowers know where they stand. You've probably heard stories of people applying for credit, only to find out that they are rejected because of a low credit score they didn't know they had. That doesn't happen to a savvy borrower, because he's done his homework first, says Bach. “Smart borrowers pull their credit report and try to correct any errors in advance of loan shopping so they can work to get in the best possible position for better rates,” he says. They also know roughly what their credit scores are so they don't apply for credit products that they won't be approved for.
4. Smart borrowers are not impulsive. Many consumers today do not know what it's like to delay gratification, says Kingsbury. She recommends taking a page out of the 1950s, when folks would save up for months in order to buy a home appliance. “It sounds antiquated nowadays, but it's a good practice,” she says. Being smart about borrowing sometimes requires you to walk away even after a line of credit or loan is approved. If something in your gut tells you that you're in over your head, it's probably not the right time to borrow.
5. Smart borrowers seek advice. Kingsbury says you can start by having a conversation with your partner or family before you sign on the dotted line. Beyond that, for bigger borrowing decisions (such as a home equity loan or refinancing), consider speaking to an accountant, a financial adviser or a trusted person who is knowledgeable about the lending product you're pursuing.
6. Smart borrowers shop around. Banks are competitive on mortgages, and credit cards are offering zero percent introductory rates. “We're back to a competitive environment in which consumers are able to shop around and find the best lender,” Bach says. He recommends going online to research your options, but also let your current lender compete for your business. Whether it's asking a card issuer to consider lowering your interest rate or getting a second opinion through a mortgage broker about a home loan, Bach says that being aggressive can pay off. “The person who negotiates is going to get a better deal,” he says.
7. Smart borrowers take less than they need. “We tend to be extremely optimistic about our ability to pay our bills,” says Bach. That's why many people take “a little extra” when borrowing, or add bells and whistles onto a car even though it pushes an auto loan bill higher. That optimism is partially responsible for the real estate market collapse, in which borrowers were encouraged to go for larger loans than they could really afford.
“Borrow 10-20 percent less than the bank says you're qualified to borrow,” says Bach. By leaving some wiggle room, you're less likely to get behind in paying your bills.
When it comes to credit cards, keep your debt utilization ratio under 30 percent. That means don't carry a balance of more than 30 percent of your credit limit, or it will affect your credit score in a negative way.
Lending products can be great tools in helping you have the things you want in life as long as you borrow responsibly. By adopting these smart borrower traits, you can stay in control of your finances.