The key to responsible borrowing is to avoid over-borrowing and commit to make timely and full repayments after borrowing. Therefore, apart from a clear understanding on your financial condition, a proper attitude on financial management is also important.
To ensure the ability to make timely repayment, responsible borrowing emphasizes self-assessment before borrowing:
It's worth taking time to ask yourself whether taking a loan for a certain reason or a financial goal is reasonable. For example, taking out a loan to pay for a home (e.g. mortgage) or for education (e.g. student loan) is justified, but borrowing for discretionary items or even the repayment of another loan is unacceptable.
As mentioned above, you should commit to repaying after borrowing. Thereby, it is important to determine your ability to repay the principal and interest before taking out a loan. Moreover, you should take into account daily expenses and provisions for contingencies. Borrowers usually can ask for repayment schedules and interest details from lending institutions to facilitate the calculations.
Borrowing may involve other charges, such as handling fees, and there are floating-rate loans with an interest rate that is subject to the social condition or global economy. Besides, if you can’t make repayment or fall behind on your payments, your credit score will suffer which makes it a lot tougher to get loans in the future.
People may resort to borrowing for convenience, or because they have poor money management. The truth is, as long as you cultivate a good habit in managing your personal finance/ start managing your personal finance properly, increase capital through savings, investment or reduce unnecessary expenditures, you can help reduce the odds for borrowing and reduce financial risks.
The use of credit cards is a form of borrowing. To achieve responsible borrowing, Little Thrifty always sets a reminder on mobile phone to remind himself about payment due dates a week in advance. Moreover, he always pays his full credit card balance instead of the minimum repayment amount as the latter will incur finance charges. By not fully repaying the outstanding balance, new transactions will immediately incur the finance charge. One should also assess your financial situation, needs and repayment ability, before using credit cards or other credit products!
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