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Financial Crisis Effects: Borrowing Money Today

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The Bank of America is aware of the changes taking place in consumer behavior. For this reason, the Bank of America published a short guidebook about how today’s economic events are affecting Americans. The guidebook titled Get Smart About Debt, talks about how the credit crisis has changed the math of Americans on borrowing money and paying it back. Further to our previous blog post, Changes in Consumer Behavior Resulting From Economic Crisis, we want to share with you some hints we found interesting in this guidebook.

Rule 1. Borrow only when it makes financial sense

Before the present crisis, borrowing money was easy. By 2007, U.S households owed $1.33 for every 1$ of disposable income. But since debt must be paid back, many Americans couldn’t cope when the financial crisis hit them.

Since we can learn from past experience, before taking on more debt, take time to strategise your decision wisely, so as to avoid a repeat situation. Consider why you are borrowing. Is it “good debt”? Such as mortgages or student loans. Or “bad debt”? such as using credit for a new flat screen TV.

Here is a quiz Bank of America is suggesting. Please take a few minutes to do it; it may give you an idea of where you stand.

Quiz: Loan or no loan? Answer the following questions to decide:
Are you investing in an asset that will add to your net worth over time? (Example: a degree, a home, a business) YES NO
Is the loan’s interest tax-deductible YES NO
Is your credit score high enough that you’ll qualify for the lowest available interest rate? YES NO
Will your total debt payments remain less that 30% of your pretax monthly income? YES NO
Could you afford the payments even if you were out of work for six months? YES NO
Can you prepay the loan without penalty? YES NO

If you answered YES to:

- 5 to 6: Borrowing may make sense

3 to 4: Hmm…. it may not be wise

- 0 to 2: Forget it for now.

Rule 2. Set yourself up to get the lowest rates

As a result of the latest financial events, getting a loan today is much more difficult. Lenders are more cautious: they want to be sure you are a low default risk. The FICO score, which is the number used by most lenders to determine your creditworthiness, will give them an indication of whether you are a sure bet or not. The higher your FICO score is, the lower the rates you’ll pay. Take a look at these suggestions to help you boost your score.