How to Borrow Money Wisely

hansy-kapoorA credit card can be a curse, but it can also be made a blessing if you know how to use it wisely. It can help you purchase things that you may not be able to afford otherwise such as a lavish house or a convertible car. However, it can also bury you in debt, which can drain your finances. Here are some things worth considering before you take that debt:

Is your income stable?
Is your job secure?
What are your expected expenses?
How much cash will you need on hand every month to be comfortable?
What are your long-term financial goals?
Will you be able to afford your kid’s college fees?
Will you be able to save even with the increased load of the debt?
Will you have money available in case of an emergency?

The Costs of Borrowing

debtsCredit costs you more money than you borrow, which is why when you’re borrowing, you should always look to get the lowest possible interest rate.

For mortgages, this rate will equal the prime rate set by the Federal Reserve. For borrowing via a credit card, this rate will be the prime rate plus the lender’s margin rate. This rate depends on your credit, so it could be 2.5% for good credit customers and 10% for people who have low credit scores.
Calculating Interest

Debt consolidation Las Vegas lenders have several different ways of calculating the interest. This greatly depends on how much you’ll be spending during the course of this loan. It’s important to know the methods enough that you can identify them when you see them in the fine print of your debt consolidation Las Vegas loan contract.

Adjusted balance will be the amount you’ll owe at the beginning of your billing period minus the credit and payments you’ll make during this period. New purchases will not be counted.

debtreliefAverage daily balance is the most common method. It adds all your balances for each day and divides the total by the total number of days in your billing period. Payments and credits that are made during this time will be subtracted. New purchases, however, may or may not be included.

Two-cycle average daily balance will use the average daily balance of two billing periods to calculate finance charge. All the payments and credits will be considered.

Previous balance will base the finance charge on the total amount owed at the end of the billing period.

The Costs over Time
BHA (Bankcard Holders of America) calculated the finance charges on the same account in four different ways. It developed a scenario in which $1000 charge plus a minimum payment was made the first month. In the following month, another $1000 charge was made and the entire balance was paid off. The interest was calculated on this scenario in four different ways and here’s how the charge differed.

Using average daily balance and including new purchases, the charge was $33. Using the same method but excluding new purchases, the charge was $16.50.

Using two-cycle average daily balance and including new purchases, the charge was $49.05, while when using the same method but excluding new purchasing, the charge was $32.80.