Credit Card Interest Rates: An Explanation
If you’ve ever had a credit card, or handled any type of loan from a financial institution, then you’re probably well-aware of interest rates. However, do you actually know what these mysterious percentages actually are? Moreover, are you aware how these fluctuating rates can impact your overall financial health? If you’re currently handling credit card debt, or are considering opening a new credit card, then it’s essential that you fully understand how interest rates affect not only your monthly payments, but also your financial health as a whole.
What Are Interest Rates?
In order to understand how interest rates affect your monthly bills, it’s important to first understand what this commonly used term means. In the most fundamental sense, interest is a fee that’s passed on to you for borrowing money. When a lender gives you money, they must make a profit on such a gift. Therefore, they tack on an interest rate, which you must pay along with original sum of money you borrowed.
Without interest rates, there would be no credit system. It’s within these variable percentage rates the financial industry remains profitable. When you’re opening a credit card, the lender looks at your credit report. Should you have a fair or poor credit score, the amount of interest you’ll be expected to pay will be greater than if you have an excellent credit score.
The reason for this is quite simple: the lender wants to make money off of the loan they extend to you. If they’re afraid you won’t pay your bills, they’ll tack on extra interest to “squeeze” as much money from you as possible. That’s why when you have a legacy of paying your debt and keeping your credit score happy, your interest rates go down. This occurs when the lender views you as less of a risk.
When it comes time to actually pay your credit card bill, many financial strategists recommend paying the entire balance. Why? Because you’ll actually save money in the long run. Credit card interest rates are only applied to balances within the actual account. Therefore, if you have no balance at the end of the month, then you won’t have to pay any interest. This is especially important for those who have a high interest rate on their credit cards.
Just because you have sub-optimal credit doesn’t mean you have to spend hundreds of extra dollars on interest rates. What it does mean is you’ll have to be wiser when it comes to how you spend your money. As a general rule of thumb, try not to charge more than what you can feasibly pay back within the same month or within two months. If you follow this rule, you’ll not only see an increase within your credit score, but you’ll save money in the long run.
The Most Common Reverse Mortgage Pitfalls
If you’re interested in utilizing a reverse mortgage to support your monthly income, you probably have a lot of questions. While a reverse mortgage can be an excellent option for seniors who have a limited monthly budget, if this process is not carefully considered and carried out in a professional manner, then the results can be disastrous. In an attempt to provide those considering a reverse mortgage with solid information, we’re going to discuss the most common pitfalls of a reverse mortgage.
Pitfall #1 – High Costs/Fees
The primary idea of a reverse mortgage is to draw out the equity you’ve built when owning your own home. However, the initiation of this process isn’t without its own unique costs. When you engage in a reverse mortgage, you must pay the bank a fee to begin the transaction. In fact, this fee can be anywhere from $2,000 to 2 percent of the entire loan amount – whichever is higher. If you don’t have access to this type of money, you can roll the fees into the interest of the loan. Another common fee is to pay a monthly service fee, which can range anywhere from $30 to $35 per month.
Pitfall #2 – Lack of Inheritance
In most cases, seniors wish to leave their family home with their heirs. However, when a reverse mortgage is initiated, the lending institution must be repaid. This is either done by fully repaying the loan amount or selling off the family home and then forking over the proceeds of the sale to the bank. In some cases, homeowners can take out an insurance policy where their beneficiary can then repay the loan with the insurance policy. However, as many have learned, this amount isn’t always enough to fully repay the loan.
Pitfall #3 – Future Financing Impact
Whenever you agree to a reverse financing loan, you’re creating a significant liability as the loan must be completely repaid – with interest. However, far too many borrowers don’t actually understand that when you obtain a reverse mortgage, you’re actually putting your ability to achieve another loan – or even open a credit card – in jeopardy.
Although this may not be a major concern for the majority of elderly people, as they are less likely to make a giant purchase, such as a new home or a brand new car, such a sizable loan does have real implications when it comes to your financial security and stability. A notion definitely worth considering.
What Do Lenders Look for in Your Credit Report?
Whether you’re looking to open a credit card or purchase a new vehicle, many consumers are curious as to what lenders actually look for when they review your credit report. While you may think this is a simple answer, the reality is much different. Because there are no universal standard in which a lender determines your overall creditworthiness, it’s important to understand that even if you have a good credit score, you still may not qualify for all financing options.
This being noted, there are several qualities that appear to be equally as important throughout the financial industry. Within this article, we’re going to discuss several of the most common elements lenders look at when determining your overall creditworthiness.
#1 – Payment History
Perhaps more than anything else within this article, your payment history is the most important element a lender looks for – and rightfully so. Your payment history clearly demonstrates your ability to pay your bills on time and lenders look at this data to determine whether or not they’ll actually receive their money. According to a variety of financial experts, your payment history accounts for roughly 35 percent of your overall FICO credit score. When you have late payments, missed payments or payment defaults, a lender sees all of these as red flags. While there is room for accidental missed payments, if there’s a major trend in you not paying your bills, don’t expect to receive a loan or credit card anytime soon.
#2 – Outstanding Debt
The amount of debt you have currently outstanding is a major concern for the majority of lenders. However, this can be confusing for many consumers. Why have credit cards when utilizing them can hurt your credit report? Well, there’s a balance you much achieve. When it comes to revolving debt – or credit cards – you’re expected to keep your outstanding balances under 30 percent of your overall lines of credit. The importance of this element makes up roughly 30 percent of your FICO score, so make sure to pay attention to the total amount of debt you have outstanding.
#3 – Credit History Duration
An obvious fact is the longer you have a history of credit, the more trustworthy you’re viewed by lenders. Because of this, many lenders take into consideration the duration of your overall credit history. Are you looking to really boost your creditworthiness? If so, then never close older credit cards – even if you never intend on using them again. The duration of your credit history comprises an average of 15 percent of your FICO credit score.