How to Know when to Borrow

Just like lenders make decisions based on your FICO credit score on whether to lend, you have to edit yourself when it comes to knowing when to borrow. How to know when to borrow is a skill that many people only learn when the economy is going down, and that's too late. We as a whole must live within our means to avoid personal and systematic economic breakdowns. So here's how to know when to borrow.

The first step to know when to borrow is to know the difference between good and bad debt. Good debt is debt that will buy you an asset that keeps or adds value to your net worth over time. This is like a house or an education continuation. Bad debt is that 70 inch flatscreen HD with the remote control that also does the dishes. To know when to borrow, you must know that you only borrow to buy assets.

After you dedicate yourself to only borrowing for good debts, you must now check to see if your FICO credit score is low enough that you'll qualify for the lowest interest. If not, you might consider putting off borrowing, and using the money you have to pay down debts. To know when to borrow, you must take the cues of professional lenders. When they punish you to lend to you, it's not time to borrow.

The third step to know when to borrow is to consider tax deductions, which is real money in your pocket. Mortgages, if you can afford them, give great tax deductions. Cars' interest is also tax deductible; maybe the payment if you're using it for business purposes. But to know when to borrow, factor in the tax benefits, especially if you are self-employed or a business owner.

After you work out the tax benefits, the next number to check is that your debt payments aren't more than 20% of what you bring in monthly. If they are, the first thing you need to do is raise your monthly income. One accident could put you underwater, essential to factor in to know when to borrow.

You must be able to prepay without penalty. Get your contracts straight before you borrow.

The last step to know when to borrow is to have an emergency fund of 3 to 6 months. You must be prepared for a worst case scenario when you prepare to borrow money. If you can be out of work for this long and still make payments, then it's ok to borrow the money.