Are you thinking twice about borrowing money? There’s no shame in that. Being in debt is a normal part of adulthood, especially if you have bigger ambitions. What’s important is to be smart about it. Borrowing wisely could spell the difference between good and bad debt.
Borrowing money doesn't just entail asking for extra cash and using that for yourself. There are better ways to borrow, which would help you avoid common credit mistakes such as missing payments, letting your balance carry over to the next month, and maxing out your credit limit. Making credit mistakes can lead to low credit scores, impacting your ability to borrow money in the future.
What is a credit score?
Lenders have a grading system for a borrower’s ability to repay their debts. This system is based on your past financial transactions, which tells the lender how likely you are to repay the money you owe.
So, the more likely you are to remunerate your loan, the higher your credit score. And the higher your credit score, the higher your chance of getting approved for future loans.
What factors affect your credit score?
- Payment history – whether or not you pay your bills or installments on time
- Length of history – how long since your loan started or since you opened your account
- Credit utilization rate – the percentage of your available credit that you are using
- Credit mix – the number and variety of credit you have (i.e. car loan, mortgage, credit card, personal loan, etc.)
Banks and other lenders consider all these factors when building your credit score. Closing your account in one bank and then opening a new one in another doesn’t reset your credit score either. Your credit score is determined by the Credit Information Corporation (CIC), to whom all banks and other financial institutions submit their clients’ credit information.
The CIC is the public registry and repository of credit information in the Philippines. It compiles all credit information and generates borrowers' credit reports. It is from this centralized report where banks and lenders see your credit score.
So, how do you maintain a good credit score? Make sure to follow these tips:
Tips on borrowing wisely and avoiding credit mistakes
- Review your finances
Before taking on any debt, it's essential to evaluate your financial situation. Determine your current income, expenses, and existing debt obligations. This assessment will help you understand how much you can realistically afford to borrow and repay without jeopardizing your financial stability.
Stay proactive and aware of your financial status to prevent overborrowing and maintain control over your credit.
- Be strategic with your borrowing
Being in debt is not always bad. It shouldn’t be a problem so long as you have a clear repayment plan. Never borrow more money than you can repay. By borrowing within your means, you can avoid late payments and accumulating interest.
There are many instances when borrowing money is a smart choice. If your debt doesn’t cost you more in the long run, it’s like getting your future earnings in advance. If credit provides certain perks, then you’re benefiting from it.
For example, credit cards offer many opportunities for strategic borrowing, like 0% installment plans. Plus, if you take advantage of rewards points and special discounts, you get extra benefits simply by using credit instead of cash.
- Choose the right type of loan for your needs
Doing proper research before applying for a loan can save you a lot of money and save you from headaches. You can choose from many types of loans depending on your needs—from buying your own home, paying for home renovations, buying a car, or for any personal purpose, such as travel or education.
When researching loan options, check the different banks and lenders along with the various interest rates and payment options they offer. Make sure you apply for a loan from reputable institutions. Avoid payday loans with high interest because these add up the more times you borrow, pushing you deeper into debt.
Before choosing a loan, you also need to consider your existing debts. How many outstanding loans do you currently have? How many more years or months do you have to pay your installment? Ask these questions to determine the right loan type, loan amount, and loan tenure for you.
- Read the fine print
Credit is not just about how much money you owe and how much you should be paying in monthly installments. Sometimes, loans come with other minute details that can impact your ability to repay your loan.
Before applying for a loan, study all the charges that come with it, such as loan processing fee, etc. Check the flexibility of the loan for which you are applying. Is the interest rate fixed? For how long? Can you shift from fixed interest rates to yearly adjustable rates within your loan tenure? If so, how much is the fee, if any? Ask your bank these questions during the application process to avoid unpleasant surprises later.
- Don’t take out too many loans
While loans can provide financial assistance and help achieve various goals, having too many outstanding loans can put a significant strain on your finances. Avoid taking on more loans than you can comfortably manage. Remember, each loan adds to your overall debt load, which can make it difficult to keep up with payments and lead to a cycle of borrowing. The more debt you have, the longer it may take to become debt-free and achieve financial stability.
Strategically pay off some smaller loans first before applying for a new loan. Consolidating your debts can also help, as it is more manageable to pay for one debt instead of several.
- Watch your credit limit
Your credit limit shouldn’t be considered a challenge that you need to meet. Ideally, you should keep your credit card balance below your credit limit and reserve the option of maxing out your credit card for emergencies and unexpected expenses.
Maxing out your credit card can have serious financial consequences. It can negatively impact your credit score, limit your financial flexibility, result in high-interest charges, and create difficulties in repayment. So, keep a healthy distance from your credit limit to avoid the cycle of debt. Making sure your debts stay within that invisible line is a good indication that you’re borrowing wisely.
- Don’t miss a payment
Failing to pay your monthly installments or being late in your payments will lower your credit score. Missing your payments also leads to penalty charges and higher interest, which means your loan is causing you to lose more money.
Make sure you can pay your monthly installment even before applying for a loan or a credit card. Opting for the autopay feature on your online payments can help ensure you don't forget to pay any of your bills or installments.
- Seek professional advice
Avoiding credit mistakes and bad debts can be easier with enough guidance from financial experts. Chinabank offers different types of loans that suit your needs throughout your life journey. Consult with our financial experts to know the best loan for you and discover all the options available—from loan tenure, types of interest rates, payment options, and more!
Borrowing money wisely is a skill that can pave the way to financial success and stability. By assessing your financial situation, understanding credit options, and making informed decisions, you can avoid common credit mistakes and navigate the borrowing landscape with confidence. Remember, responsible borrowing is about managing your debt effectively, making timely payments, and ensuring that credit serves as a tool to enhance your financial well-being.
Found this article helpful? Share it with your friends.
