Borrowing is an important part of a happy and successful life—imagine buying a home, a car, or paying for college without it. Some people get into big trouble when they borrow money, but you don’t have to. With some planning, you can make good borrowing decisions that won’t cause you problems.
There are three elements of a loan
The principle or balance, which is the amount of money you’re borrowing.
The interest, which is the cost of borrowing the money. It’s the amount above and beyond the principal that you have to pay back.
The timeframe in which you’ll pay back the loan, which is the repayment schedule. Often you’ll pay more in interest for a longer timeframe, and less in interest for a shorter one.
Borrow only as much as you need
Just because someone offers to lend you more money than you’d expected doesn’t mean it’s a good idea to borrow the higher amount.
Fixed v. variable interest rates
Fixed interest rates stay the same for the life of the loan.
Variable interest rates can change throughout the life of the loan.
Credit scores
A credit score is a way that lenders evaluate your credit worthiness.
There are three different credit bureaus that keep track of your use of credit. They examine your prior experiences with borrowing money and your overall financial picture to produce what’s known as a credit report.
Those reports are then given a credit score, often called a FICO score, which range from 300 to 850.
The more problems with your credit history, the lower your score. And falling behind on payments can do more than lower your credit score—it can also lead to extra fees, higher interest rates, and even repossession.
Low credit scores have consequences
They can make it difficult and expensive to get credit.
A credit card is actually a kind of loan
Carrying a balance can be very expensive because that’s when interest charges are added.
You can also be assessed fees if you are late making your credit card payments.