The days of easy credit are probably over.
In an environment of falling home prices and tighter credit standards, some borrowers will have trouble borrowing money through a home equity loan or line of credit, as so many did in recent years.
Others will no longer even qualify for those loans, or have enough equity in their home to tap into for another loan.
So where's the next best place to borrow money? Is borrowing from your 401(k) better than racking up more credit card debt? Where should you go to borrow money now?
Your best bet is to tap your own short-term savings. Ideally, you should have an emergency reserve of three to six months of living expenses in a high-yielding savings account. That’s easier said than done. Most cash-strapped Americans are in a position to do so. About 42% of households have less than $1000 in liquid assets (checking, savings, CDs, and stocks and bonds), according to SMR Research, a marketing research firm.
To Borrow Or Not To Borrow
Before you borrow any money, you need to ask several questions.
Where to Borrow?
“The best thing to do is avoid borrowing in the first place,” says certified financial advisor Stuart Ritter of T. Rowe Price. “But if you are going to borrow try to make sure you’re not undermining other goal, like retirement.” Pick sources that offer the lowest interest rates and pay back the loan as soon as possible.
Low-Rate Credit CardIf you're able to land a
low-rate promotional offer -- say a teaser rate at 3% or
better -- a credit card could make sense in a short-term
crunch. Make sure you pay the balance in full before the
introductory period ends. You have to be disciplined, set a
repayment schedule and stick to it, says Greg McBride, senior
financial analyst at Bankrate.com. Search for the
lowest rate cards at
. But if you're already
struggling with credit card debt, don't add to it by getting
another card. “No sense digging the hole deeper,”
The bottom line: If you’re in a hole, you have to stop digging, says financial advisor Barry Glassman. Borrowing may be only a temporary fix to a longer-term problem. You may not be able to make the purchases that you want or more drastic steps may have to be taken to change your lifestyle. Live within your means. Cut back on expenses until you're in the clear.
Editor's note: CNBC correspondent Sharon Epperson is the author of "The Big Payoff: Eight Steps Couples Can Take To Make The Most Of Their Money – And Live Richly Ever After" (Collins, $22.95).