To borrow or not to borrow?

Shakespeare’s character Polonius would not get very far in America today if he followed the advice he gave to his son, Laertes, in Hamlet: “Neither a borrower, nor a lender be.”

Society is well represented by both borrowers and lenders. In fact, American consumers owed a grand total of $1.9773 trillion in October 2003, according to the Federal Reserve. That’s about $18,654 per household—and that doesn’t include mortgage debt.

NEA Home Financing Program® St. Louis—Gloria Jones (636) 733-3437 Kansas City—Brenda Bland (816) 524-6688 Springfield—Kathey Grodi (800) 264-2535, ext. 8966 Central MO—Michael Copeland (866) 833-1615 NEA Personal Loansm (800) 545-4094 NEA Credit Card Program (888) 758-7946 Financial Planning and Budgeting Reliant Financial Services (800) 471-7717

A recent Federal Reserve study showed that 43 percent of U.S. families spent more than they earned, spending $1.22 for each dollar earned. Cardweb.com reports the average household has more than $8,000 in credit card debt, and only about 40 percent of active credit card accounts are paid off monthly.

There are many reasons that consumer debt is on the rise. Low interest rates and ease in borrowing encourage many consumers to increase their debt and put themselves at higher risk of financial problems and bankruptcy.

Be sure to check out the NEA Member Benefits programs, which are customized to meet the special needs of NEA members and their families. All NEA Member Benefits programs meet the highest standards of quality and service, are competitively priced, provide members with unique features and extra benefits, and receive ongoing scrutiny to stay in touch with members’ needs, wants, concerns and goals.

Some of the worst money moves one can make are:

• Buying “too much house” simply because a lender will approve a higher loan or because your real estate agent encourages you to buy “up” while interest rates are low. Many consumers end up struggling to afford everyday purchases for food and clothing (so they buy with credit), maintenance and repair bills, or contributions to retirement accounts and college funds.

• Borrowing short-term loans from payday lenders or car-title companies. The national average annual percentage rate charged by payday lenders is 474 percent, and the most common APR charged is 390 percent before compounding interest, according to the U.S. Public Interest Research Group.

• Borrowing from your retirement fund. Should you or your spouse become unemployed or you incur other financial difficulty, the loan still must be repaid timely or the balance is taxed and penalized as a premature distribution.

• Borrowing against your home equity or refinancing your home to cover credit card debt. Nearly two-thirds of those who did this between 1996 and 1998 ran up more credit card debt, according to one study, thereby putting their homes at risk. The only way this maneuver works is if you do not buy on credit thereafter.

• Accepting a low-interest-rate credit card without reading the fine print. Lenders are looking for new ways to boost their profits because interest rates have dropped. Consumer Action reports that late fees resulting from shorter grace periods have multiplied more than fourfold since 1996, and one-third of credit-card issuer profits now come from a combination of tiered late fees and over-limit charges, higher cash-advance fees and other penalties.

• Using credit-card cash-advance offers (including checks) when you continue to make charges on a credit card or carry an account balance. According to the industry standard, credit-card issuers apply any payment you make on your account to the balance with the lowest percentage rate, while any remaining credit-card balance and additional charges will accrue interest at the higher rate. In short, this is not a good deal unless you have no balance on your card and you make no further charges to your card until your cash advance is paid in full.

Before borrowing or buying on credit, be sure to consider all your options and find out how to borrow what you need at the lowest possible interest rate.

by Laverne Copeland
MNEA administrative assistant/membre benefits coordinator