Golden Rules of Credit
12 Nov 2020
When it comes to borrowing, it’s not just as simple as wondering if you’ll be granted the loan or approved for the mortgage. Here are seven golden rules you should follow to avoid ending up with unsustainable debt in the future
Only borrow what you can comfortably afford to repay
Although you may be able to make repayments on a loan, you should not overextend yourself so that it is placing undue duress on you. Prices might rise, taxes might be increased or a person’s rent might go up. You need to allow yourself some leeway to allow for changes which might occur.
Think about the unexpected
There can be a tendency to think that things will work out for the best but that’s not always how life works out. It can be easy to make an assumption that your earning potential will increase or at worst stay the same into the future. Unfortunately, this isn’t always the case.
Always match short with short
If you are getting credit for an annual event (e.g. a holiday), ensure that you do not end up repaying the loan over a long period. The last thing you want is to still be paying for a holiday in two years’ time or still repaying a car loan long after the car has stopped running.
Protect your Credit Rating
It may be tempting to skip a loan repayment or to ignore bills when they come through the letterbox. Burying your head in the sand is easily the worst way to deal with an issue of this kind. If you miss repayments, this may well impact on your credit rating (and/ or your relationship with the lender) and impact on your ability to borrow from any source in the short term future. If you find yourself in difficulty, talk to your lender immediately.
Avoid the use of high cost credit options
High cost credit options should only be used for the very short term. Try to avoid using a credit card (unless you fully repay the full amount before interest falls due) and certainly, do your best to steer well clear of moneylenders.
Although every regulated lender has an onus to ensure that the amount of money lent to any individual is appropriate given their financial circumstances, every individual should clearly understand the agreement which they are entering in to. If you have any questions, clarify them with the lender before you proceed. And it sounds too good to be true, stop and ask yourself why this is.
Pay off higher interest rate sources of credit first
Where possible, a person should pay off debt with higher interest rates first. For example, if you owe €1,000 on a credit card which charges 18% APR and you have an overdraft which charges 14%, you should aim to pay off the credit card debt as quickly as you can. In that way, you’ll minimise the interest that you pay.
Money on your Mind is a new series which aims to help you build your financial confidence. You’ll find insights, tips and suggestion to help you feel more knowledgeable about managing your money, as well as jargon free answers to some basic financial questions.
The content within this series is aimed to provide general guidance and information only. It does not represent financial advice.