How to borrow wisely to make credit use easier – The Province

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Using credit begins with wise borrowing choices in line with your budget. The right credit product, lender, and terms can help avoid debt problems.
Q: I’ve switched from an undergraduate program at university to a two-year diploma program at a technical school so that I’m more employable while I work on my related degree. However, my course load at university had flexibility. I’ve lost that with the diploma program. It’s a full-time course load with a lot of homework. In order to keep my grades up I’ve had to reduce how much I can work, which is leaving me short of cash. I’m trying to decide if I should take out a student loan or not. I’ve recently been approved for a credit limit increase on my credit card, so that will help, too. What should I consider before I apply for a loan? ~Ethan 

A: Furthering your education and ensuring that you’ve got marketable skills when you’re done is a wise course of action. There are many ways to go about it, and it sounds like you’ve put some thought into how you can achieve your educational and career goals. However, I would encourage you to expand your planning to include wise choices for your finances as well. How you manage your money and how much credit you use while pursuing your education will have a direct impact on the decade after you graduate.   
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Borrowing money is a big decision. It involves shopping around for rates, choosing the right product and lender, and entering into a legal contract with terms and conditions that work for you now and in the long run. While some forms of debt are considered good and others bad, we all know what they say about too much of a good thing! 

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Here are tips to keep in mind as you make your borrowing decisions: 

When applying for a loan, it’s important to consider your budget. If you haven’t outlined your budget, that must be Step 1. You need to know where you stand and if you can afford any more payments before you speak with a lender. A lender will calculate how much they can lend you based on your gross (before tax) income. This is much different than balancing your overall spending against your net (after tax) income. 

Student loans are unique. Payments aren’t required as long as you remain in school. While initially this makes it easier to afford the loan, it masks what you’ll face once you leave school. The payments can be considerable if you used student loans to finance a lifestyle and not just your education.  

Decide for yourself how much you need or want to borrow before you speak with a lender. Borrowing as much as your friend, family member, or colleague is not a useful measuring stick. Unless they’re going to make your payments for you, only borrow as much as your budget realistically allows. 

How Much Debt is Too Much? 

Part of deciding how much to borrow comes down to determining what you need the money for. If you need money for one particular purchase, such as a laptop, versus help with living costs, such as those over the course of a two-year program, it can be easier to determine how much you need. However, let your budget be your guide. That will also be the best way to determine your monthly shortfall if you need smaller amounts of money over a period of time. 

Because credit comes at a cost, if you’re running short of cash each month, before you consider a student loan or supplementing your income with a credit card, consider if there are any other options to close the gap. Can you reduce any of your expenses temporarily? Is there a chance you could take in a roommate or sell your car to eliminate the monthly loan payment? Could you take a job in a restaurant to get some of your meals at a reduced cost? Managing our finances and balancing our budget always comes down to a series of smaller decisions. Make them wisely and adjust them as your situation changes. 

Why a Payday Loan Won’t Solve Your Money Problem 

Borrowing wisely and using credit wisely are related, but they are not the same thing. Before you take out a loan, credit card, cellphone contract, mortgage, student loan, or other form of credit, shop around for the right product, lender, interest rate, and terms and conditions. While you can do some of your research online, it will be important to speak with various lenders to gain a full understanding of your options.  

What Do Lenders Look at When You Apply for Credit?  

With some forms of credit, you will borrow a specific amount and will need to make fixed payments for the duration of the loan. A car loan or even a mortgage work this way. With other forms of credit, you are approved up to a specific limit. Credit cards and lines of credit work this way. You are then only responsible for making payments on the portion that you use. While the payments might initially be smaller, the temptation to spend to your limit is greater. This is where borrowing wisely collides with using the credit you’ve been granted wisely. 

Some forms of credit, like a student loan or mortgage, can start out well and seem like a wise borrowing choice. However, when you overextend yourself, even debt that creates value or wealth, can turn bad. If you would like help ensuring that that doesn’t happen to you, reach out to a non-profit credit counselling agency in your area. They’ll be happy to help you work through the steps you need to borrow wisely, use the credit wisely, and know what you’ll face when it comes time to make payments. And if you’re already in over your head, they’ll be happy to help you get back on track.  

Related reading: 

5 Warning Signs That You Have Too Much Debt 

Are You Missing Out If You Don’t Have a Credit Card? 

The Top 5 Things Young Adults and Grads Can Do for Their Finances 

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email, check nomoredebts.org or call 1-888-527-8999.  

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