Interest rates indicate the cost of borrowing money. When you borrow, lenders charge interest on lent funds because they forgo the opportunity to invest the money and risk the possibility that you will not pay the debt. Interest can be very expensive, especially if a lender perceives you as a risky borrower. Avoiding and reducing the interest you owe on debts is one of the keys to building wealth.
Credit Card Interest
Credit card debt usually carries high interest rates which can make it difficult to pay back if you accrue a large balance. Credit card companies require minimum monthly payments on card balances, but they are often set so low that it takes years to pay off balances in full. The longer you carry a credit card balance, the more interest accrues and the more total money you have to spend on interest. Pay off credit card balances in full each month to avoid paying any interest on spending.
Prioritize Debts
The average person is likely to have several different debts such as credit card debt, auto loans, student loans and a mortgage. The interest rates on each debt you have will probably be different. Paying off the debt with the highest interest rate as quickly as possible will help you avoid spending more money on interest than necessary. You should, however, always at least make the minimum payments on debts, since missing a payment can hurt your credit score.
Build a Good Credit Score
A credit score is a number that encapsulates the risk you pose to borrowers. If you have a high credit score, lenders will be more willing to give you loans, and the loans you receive will likely have lower interest rates. A good credit score can amount to hundreds or thousands of dollars in savings on large loans like mortgages and auto loans. Paying your debts on time, keeping low credit card balances and establishing a long credit history can help boost your credit score.
Consider Refinancing if Interest Rates Fall
Interest rates can go up or down over time. If interest rates have fallen significantly since you took out a loan, refinancing may enable you to reduce the amount of interest you owe. When you refinance, you allow a new lender to buy out your current loan and offer you a new loan with different terms. Refinancing home mortgages is common; a half a percent reduction of the interest rate on a mortgage could result in thousands of dollars in savings over the life of the loan.
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