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Small Steps to Better Borrowing

November 2009

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Want to pay less for borrowed money, handle credit wisely, and/or get out of debt? Consider the following steps:

  • Borrow as little as possible by making the largest downpayment you can afford (e.g., to buy a car). When payments end, continue making the previous monthly payment to yourself to build up a downpayment for your next car. A large downpayment can also keep you from being “upside down” (i.e., where you owe more than the car is worth).
  • Shop for credit, just like other purchases. Compare at least three credit issuers (e.g., banks and credit unions) for the lowest annual percentage rate (APR) and fees.
  • Avoid borrowing money from finance companies. Apply at a bank or credit union first. Finance companies generally charge high interest rates and can be considered a negative reference in credit reports, thus lowering your credit score.
  • Negotiate an interest rate discount from lenders. Many credit card issuers will reduce annual fees and/or interest rates upon request. Before calling, role-play your request with a friend to sharpen your negotiating skills. If you have other credit cards or pre-approved offers, hint that you will close your account or switch to another card issuer unless your request is honored.
  • Limit credit card cash advances. The interest rate is high because most creditors charge interest from the date money is borrowed (i.e., there is no grace period), along with transaction fees (e.g., $2.50 per advance). In addition, many creditors charge a higher APR on cash advances than they do for regular purchases.
  • Transfer balances on high-rate credit cards to those with low six-month “teaser rates.” Aim to pay off the balance before the low rate expires.
  • Carry a list of credit card billing cycle dates with you when you shop. This will help you select the card that provides the longest “float” time between the date of purchase and the date that the credit card payment is due.
  • Select a credit card that best matches your debt repayment style. If you generally make minimum or partial payments, look for a credit card with a low interest rate. If you pay your bill in full, seek a grace period and no (or a low) annual fee.
  • Always pay more than the minimum monthly payment. Otherwise, it could take years to repay a loan. Even small amounts added to minimum payments produce awesome savings. For example, pay 6% of a $5,000 outstanding balance on an 18% APR credit card, instead of 3%, and you’ll save 9 years of payments and $2,975 in interest.
  • To accelerate the repayment of existing debt balances, visit and enter the names of creditors and the APR, outstanding balance, and monthly payment on each debt. PowerPay will print out a debt repayment calculator that adds the monthly payments from paid off debts to the balance due on remaining debts. Following a PowerPay calendar can result in hundreds, even thousands, of dollars of savings on interest.
  • Request a copy of your credit file. Under federal law, consumers are entitled to receive one free copy of their credit file once a year from each of the major credit bureaus: Experian, Equifax, and Trans Union. See for details.
  • Calculate your debt-to-income ratio by dividing the total monthly payment for household debts into net (after-tax) household income. For example, a family with a $250 car payment and $100 of monthly credit card payments and a $2,500 net income would have a debt-to-income ratio of .14 ($350 divided by $2,500) or 14 %. Financial experts generally recommend a debt-to-income ratio of no more than 15% to 20%. Above that, it is easy to become overextended and experience difficulty making payments. It is also recommended that consumer debt, plus housing costs (e.g., rent or mortgage payment), not exceed 40% to 50% of take-home pay.