Eight Ways To Be A Better Borrower

We cover nasty credit-card tricks, debt consolidation and credit limits, amongst other things. Five other things, to be exact.

This article was first sent to Fools as part of our 'Good, Bad and the Ugly' email series. 

Borrowing money is a serious business. The Fool always encourages people to think about whether you really need the money now.

Whilst your brow is furrowed over that thought, here are some other things to ponder if you're borrowing money:

1. Your credit limit is not a target

Credit cards encourage millions of people to spend money that they don't have. Many people see a £10,000 credit limit as a target, and assume that they have been given an extra £10,000 to go mad in the shops. Bad move! Easy credit could easily become tough debt when times get hard.

2. Have a plan to pay off your debt and stick to it

How often have you allowed yourself to just borrow a little bit more, or decided that you'll let yourself pay off the debt over an extra few months? Each time you do this, it adds up in extra interest payments. It's also how, we suspect, most people end up in serious trouble, without even realising how they got there. Get a plan together.

Use our loan repayment calculator to work out how much you need to pay each month to clear your debt in the time period you want. (Calculator tip: to work out the total you'll pay - which is always a good idea - multiply the monthly payment figure by the number of months.)

3. Pay off your debts as quickly as possible

If you have a £5,000 credit card bill and pay it off evenly over five years at 10% interest, you'll pay £1,261 in interest. However, if you can pay more each month so that you pay it off over three years, you'll reduce that bill by more than £500 to £726. What's more, you'll have two extra years of being debt-free and saving!

If you have more than one debt, you should use the snowballing technique to get debt-free faster! Read more in The Motley Fool's How To Get Out Of Debt guide.

4. Credit cards offer flexible payments. But is this really good for you?

Make your credit cards work for you. Unlike most personal loans they are flexible: you can overpay without penalty, which can vastly reduce the interest you'll pay in the long run.

Flexibility is a double-edged sword though. It's easy to get in the habit of just paying the minimum, but your debts will build up quickly if you do this. Make a plan to pay off at least 4% of your debt each month, to clear it in a sensible time.

5. If you consolidate, don't take on more debt!

The Motley Fool research has found that five out of six people who consolidate their debt end up getting into even more debt! This is primarily because they haven't addressed the issues that got them into debt in the first place. Secondly, it's often because of credit cards. After rolling all the loans together, you might have lots of empty credit cards. Don't use them after consolidating; cut them up.

6. Consider other ways to borrow

Remember that credit cards are usually an expensive way to borrow. It's only by being a clever Fool that you can beat the lenders. That's why, if you're not on a 0% deal or an ultra-low lifetime fixed rate, you could probably do far better by borrowing some other way, such as a personal loan.

You may also want the comfort of a fixed monthly payment, so you know that you'll pay it off over a set period. If you think you'll be tempted to spend more and underpay with credit cards then, again, an unsecured personal loan is probably more suitable for you.

7. Be aware of nasty tricks

Lenders rely on ignorant slips to boost their profits. Don't let them! You can read about a dozen of these booby traps in 12 Ways Your Credit Card Rips You Off!

8. If you can't get any decent credit-card deals

You may find that you're not accepted for any decent deals, in which case you'll need to have a re-think about how you borrow or even whether you should borrow more at all. Here are some starting points:

 If you have debts, you're in debt. It doesn't matter how small they are. You could still benefit by reading our guide on How To Get Out Of Debt.

 Get tips from fellow debtors on our Dealing with Debt discussion board.

 Understand credit ratings: read Why You Can't Get Credit.

> Compare credit cards and unsecured personal loans.