A lender's fantasy is to have thousands of borrowers, up to their ears in debt, who transfer a major portion of their earnings to him each month in the form of interest and charges. On the other hand, this scenario can be a borrower's worst nightmare. Indiscriminate use of credit has brought even the biggest real estate moguls low. Between them, Bill Zeckendorf, Donald Trump, and Bill Levitt lost $billions because of debt. Using credit can become a habit that's very hard to kick.
Lack of financial discipline is what creates “Money Junkies” who can't get through a month without a credit “fix”. Here are 10 tips to help avoid becoming one:
1. Only borrow money when it will earn a net profit over its cost. Don't borrow to buy “toys”, or consumables that will either be used up or worn out before your loan is paid off.
2. If you pay 18% in credit card interest, that leaves 82% of your earnings to live on; ultimately reducing your lifestyle.
3. If you're satisfied living on 82% of your earnings, save the 18% difference for your retirement rather than paying it to the banks.
4. After signing a mortgage, start your payments right away. Just one month's delay can cost you extra interest for 30 years.
5. Don't use ATM machines. Banks charge you extra fees to use them.
6. Don't sign direct reduction loans under the rule of 78s.
7. Don't sign a note if it allows banks to freeze your account.
8. Beware of reverse amortizing, interest-only, and balloon notes.
9. Short term and renegotiable loans protect the lender, not you.
10. Don't incur debt for tax shelter. Over time, capital gains taxes wind up costing less than interest.
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