In today’s economy, there are a lot of moving parts resulting in a steady decline of available capital for individuals and companies alike. You may have read the news about banks now adding an additional 3-4% interest rate to new lines of credit being granted to individuals just to fight inflation and begin to replenish the natural reserve. It is an unfortunate time to deal with the exhaustingly high-interest rates today, but did you know that there are some methods you can use to help you get better interest rates and save some cash? Let’s explore the topics of interest rates and what you can do to get a better rate on your next or current line of credit.
What are Interest Rates?
If you currently have lines of credit, you have definitely seen or run across the term interest rate before. Interest rates are simply the price you pay to borrow money. Whether you are obtaining your first mortgage, student loans, or a credit card, when you accept borrowed money, you generally have to pay back the original amount plus a certain percentage of the money lent as interest.
This interest comes in the form of a percentage (%) of the value of the loan or money lent to you. Interest rates are typically calculated from a few factors:
Your current credit score
Your credit report
The state of the economy
The value of the loan itself
Two of these may jump out to you as a bit strange but will make more sense to you in just a moment. Your credit score as mentioned in previous articles on our site is calculated based on everything that is displayed on your credit report. So having a strong credit score is not the definite decider of whether you get approved, as lenders inquire about your credit by pulling your extensive report. The purpose of that is in order to distinguish the items on your credit report to determine why your credit score looks the way it does, and more importantly view your payment history with the accounts reflected on the report.
So why does the state of the economy have an impact on your interest rate? Great question! The best way to explain that is if the economy is slowly heading towards a downward trend, the value of borrowable cash tends to increase. What this means is that it is more expensive to borrow money, which will lead to higher interest rates. When the economy is doing well, the value of borrowed money becomes less, which means that any line of credit that can be attained will be attached with a much smaller interest rate.
The value of the loan also plays a big part in the interest rate that is attached. Although all of these items will be considered in the interest rate, the actual value of the loan is a big consideration in whether the interest rate will be higher or lower. Typically, much larger loans tend to carry smaller interest rates due to the size of the borrowed money, as well as the ratio of the interest rate to the loan value. For example, for a $100,000 business loan, a 1-2% interest rate will result in the bank making $10,000-$20,000 solely on interest. If it was $10,000, a 1-2% interest rate will be less likely due to the bank making only $1,000-$2,000 on interest.
Why Do Credit Cards Have Such High-Interest Rates?
Credit cards seem to always have some ridiculous and outlandish interest rate attached to the line of credit given to you by the bank. Well, the reason why won’t make the banks seem as crazy as you may think they are.
Almost all credit cards are sources of revolving credit. The term revolving credit means that this line of credit automatically replenishes as the debts are being paid off. Exactly what your credit card does. When you use up to your maximum limit, you will then be able to pay off the outstanding balance and any interest and fees associated, to then have the opportunity to use what you have paid again. This is a cycle that occurs every month and is one of the most common lines of credit to obtain.
The reason why your credit card has such a high-interest rate, is due to it not being a fixed amount that you must pay back on a monthly basis. But I have a minimum due every month! That is because you use a hefty amount of your credit card. The reason why credit cards carry such a high-interest rate is that the bank has no guarantee on how much you are going to spend that billing cycle. You have up to your credit limit, so you can choose how much debt you wish to incur. In one month you may use $700 of your $1,000 credit limit, and in the next cycle, you can use only $40. The decision of how much debt you wish to incur is up to you, which is why the bank will attach a higher interest rate in order to make money off of you when you do choose to use significant amounts let a balance rollover.
How to Save on Car and Mortgage Interest Rates
The 2 biggest purchases that most individuals make in their lives will be getting a car and purchasing a home. Once you have made that purchase, if your credit score is low, you will most likely have a relatively high-interest rate attached to that loan granted to you. It is not because they want to make it harder on you, it is solely because your credit is not in a strong enough standing, so they attach a higher interest rate to guarantee they can retain their profit before the risk of you missing payments comes to reality.
There are some options when it comes to saving on interest rates when obtaining such large lines of credit. The best and most immediate way to save is to be patient. What that means is to make sure you stay patient and make sure your credit score is as strong as possible prior to even applying for a mortgage or car loan. Having a strong score immediately will result in you obtaining the line of credit with a regular or lower interest rate.
But what if I have a car loan or mortgage already and I have it at a high rate? Don’t worry, there are options. When it comes to your car, not a lot of people know that you can actually qualify to refinance your vehicle after 6 consecutive on-time payments. When you refinance, you are essentially electing to have a new bank (or the current financing bank) reevaluate the loan value and provide a new rate as well as a new monthly payment. This will result in a new account on your report and your previous to be closed but it is beneficial to save some money extremely quickly.
Mortgage loans can also be refinanced after a 6 month period. After 6 months of on-time payments, you can also request refinancing through a new bank or the current bank. The best way to save as much as possible with the refinancing process is to ensure that your credit score is making positive gains from when you first obtain the loan to the day you apply to refinance.
What if My Credit Scores are Still Too Low to Refinance?
There are plenty of options to strengthen your credit score before you apply for a refinance or a new line of credit with a low-interest rate. Credit Repair is definitely a good option if you are dealing with derogatory or delinquent marks on your credit. Once you are able to take a look at your full credit report through a reputable credit monitoring service, dissect which items are giving you the most resistance. If you are dealing with late payments, charge-offs, collections, medical bills, repossessions, or bankruptcies, definitely have a professional credit repair agency take a further look and have them step into work on getting those items removed from your report. This will have an immediate effect on your credit report and more importantly your credit scores which will assist you in getting approved for new lines of credit and make the refinancing process work in your favor.
How to Save on Interest Rates on Credit Cards
As mentioned earlier, credit cards usually always have a high-interest rate. The lower end usually looks like 12% and can be as high as 35-40%. This isn’t the end of the world, which may seem like good news. What if there was a way to not even get hit with an interest rate every month on your credit card? Well, there is a way!
It’s actually really simple math that you probably learned in elementary or middle school. What is 0 times any number? That’s right it’s 0! So, if you were to pay your balance down to $0 every month, if they try to add interest, they can’t! Zero times 99% is still zero! So if you are struggling to deal with your credit cards and getting hit with interest rates every month, try paying off the full balance, and using a select amount every billing cycle and pay it down to zero. You will see you will no longer be hit with obnoxious interest rates and forcing you to fork over more than you spent.
Conclusion
Interest rates are the deciding factor of whether your house will feel like a home, or your car will feel like truly your car. The economy today has spiked interest rates relatively higher than it has been in recent times, but there are solutions to saving on interest. Refinancing once you have a better credit score after 6 months of on-time payments can be done for both your car loan and mortgage. It is important to make sure your score is better than it was once you obtained your loan the first time you applied. To save on your credit cards, simply just pay down the balance to zero. Zero times any interest rate will still be zero, so they can’t add interest if there is nothing to add it to. If you are struggling with a low score, definitely reach out to a reputable credit repair company, such as ourselves, to help you get these negative items removed from your report and also construct a game plan to help your credit reach a strong standing to make the refinancing process much easier and help you save much more in the future!
