Financial Literacy - Smart borrowing
10 do's and don'ts for borrowing money

9. Don't carry a balance -- or at least aim to eliminate them

The Financial Literacy survey conducted in February by GfK Roper for Bankrate on the subject of debt management found that 45 percent of Americans carry a credit card balance from month to month. Thirty-three percent had a car loan and 20 percent owed money on a home equity loan or line of credit.

Most experts recommend paying down loans as quickly as possible. If it's feasible to pay off a car loan, student loan or even a mortgage early, do it, says Mihalik.

For revolving debt like credit cards, it's best to exploit them (rather than be exploited) by paying what is owed by the due date.

"There are people who use credit cards as they are intended to be used, in my opinion -- as a convenience -- and then they pay them off at the end of the month," says Bolson.

"For those who use credit cards responsibly, they can really pay you back," she says.

10. Don't extend loans too far or borrow more than you can pay back

Obvious? Yes. But it's an oft-overlooked rule to borrowing. A common error that befalls borrowers is focusing too much on the monthly payment and disregarding the fact that they will have to make that payment for the next 72 months of their lives, in the case of lengthy car loans.

A lot can happen in 72 months that may preclude the ability to make car payments.

"Ultimately, you're responsible to pay off the entire loan amount," says Mihalik.

"Very few people have the money to pay cash for a home, so it's usually necessary to take out a mortgage. However, there's a caveat -- people must make sure to get value for their money and not overextend their finances," he says.

The general rule of thumb for borrowing for a home is that the payments should not take up more than 25 percent of your take-home pay.

Further, according to Bankrate's debt adviser, Steve Bucci, most consumers should not have a debt-to-income ratio of more than 20 percent, excluding mortgage payments.

To find your debt-to-income ratio, add up all of the monthly payments you make for nonmortgage debt. Then divide the total by the net monthly household income, and voila, you have your debt-to-income ratio.

Though it's not a guarantee of perpetual fiscal solvency, keeping debt within those limits, or close to it, should make financial decisions much less stressful and less likely to lead to disaster -- something that all good financial rules should do.


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