It is important in the current financial climate to be able to borrow responsibly. From the difficulty of receiving 90% or more mortgages without an excellent credit score, to the danger of going into further debt with multiple credit cards and short term loans, being flexible but also careful with your finances is crucial. It is necessary, then, to know when and how to borrow, what traps to avoid, and how to effectively balance your budget in order to get into further trouble.
The main question that has to be asked with any type of borrowing is what you need the money for, and whether it relates to long term investments or a short term emergency. Essential borrowing, in this case, might include a mortgage loan that will allow you to buy a house, and that will be spread out in terms of repayments over a long period of time. The same borrowing context might also apply for buying a car, or for paying off a student loan. Smaller loans, by contrast, may involve covering limited emergencies like Christmas spending, or wanting to pay for a holiday.
Perhaps the worst approach you can take with borrowing is to take on more debt than you can sensibly repay - it can become easy to get into a situation where you’re living in debt, and adding to it, rather than being able to realistically pay it off. Having multiple credit cards, and making balance transfers between them to take advantage of new rates, can be problematic if you decide to keep on extending your credit, or borrowing against collateral like your home. Similarly, it’s important to not borrow just for superficial reasons, or if you don’t have the patience to save.
Responsible borrowing, by comparison, involves knowing how and when to lend, and being confident that you have a financial plan in place to repay your money; this means knowing that if you’re going to borrow £2,000 from the bank to make changes like renovations to your home, that you can repay within 12 months to a year, and that the end result will be an increased value for your property.
Taking responsibility for your borrowing also means knowing which loans are right for which situations - in this case, you can use higher risk loans like payday loans, which come with high APR and fees for missed payments, only when you know that you can cover the balance at the end of the month. Choosing to default, or rolling over loans into subsequent months is only going to make things worse for your debt.
In the same way, it’s crucial that you maintain a strong credit history by paying off loans on time, and by ensuring that you can pay the minimum on what you need. Taking out a credit card and paying it off every month will boost your credit score, as will showing that you can borrow and repay without incurring fees. You can find ways to control your borrowing and your spending, as well as your long term savings, by having a monthly budget, and by using online software and apps to track your finances, and to set up direct debits to pay off any outstanding repayments on time.