Published on March 08, 2021
Understanding Interest Rates
How they affect you and your budget and what you can do to…
In the Community Conversations blog, we’ve shared a lot of information about the importance of saving and budgeting. One of our objectives is to pass along tips that will help you make, or save, money, and ultimately give you the peace of mind that your finances are on track to help you reach all your goals.
One of the biggest ways you unknowingly throw away your hard-earned money is by paying interest. Basically, interest rates are determined by your credit score.
The questions on most people’s minds when the topic of interest rates come up include: How much do interest rates really matter? What is a good rate? Can I get a better rate?
Let’s take a look.
How much does it really matter?
Ready for a new car?
For someone with excellent credit, 781 or higher, the average interest rate for a new car is around 3.24%. This rate increases as your credit score decreases. When your credit score is between 601-660, you can expect an interest rate of 6.76% or a bit higher. These numbers can vary if you’re interested in a used car or refinancing your current loan.
Let’s do the math?
Using a new car calculator from our friends at Greenpath Financial Wellness, here’s a snapshot of the person with excellent credit. Let’s say you financed a new vehicle for 60 months and the purchase price is $39,640.
Buyer who qualified for 3.24%
- Monthly payment: $716.51
- Total interest paid: $3,350.90.
Buyer whose interest rate is 6.76%
- Monthly payment: $780.44
- Total interest paid: $7,186.32
Maybe you’re Ok with the idea of paying $60 or so more per month. But if you keep that car for five years, that will add up to $3,835.42 more in interest.
So, the answer is “yes,” interest rates matter.
What’s a good rate?
Rates on credit cards, even with “excellent” credit, can vary widely depending on the type of card you opened. For instance, cash back cards usually have higher rates (closer to 18%-23%) than a balance transfer card, which may start at zero for 12-18 months and then change to around 15% for “excellent” credit. The idea being that you’re getting perks and refunds with the cash back card so you pay more to use them. Store credit cards are much higher; some can go as high as 30%.
Let’s see how much the total interest paid on credit card debt changes for someone with “good” credit compared to someone with “fair” credit.
Our example here is $5,000 in credit card debt making a minimum payment of $200 per month and paying 13.04% APR for “good” credit and 23.13% for “fair” credit. Keep in mind that this example is paying off the debt without using the card again.
Someone with a fair credit score will end up paying $4,443.05 in interest alone (and it will take more than 13 years to pay off) while the borrower with good credit will pay $1,790.08 in interest.
Can I get a better rate?
If you’ve been making payments on time and your credit score has been rising, there’s a good chance you can improve your rates by refinancing. You may be able to lower your car payment by refinancing the balance, and a personal loan is a good way to pay off high credit card debt. Even with an “average” credit score (640-679), the average rate for a personal loan is 17.8% to 19.9%. If your credit card interest rate is higher than that, you know you’re saving money.
We’re here to help
If you’re in a position where you feel you’re paying too much interest and would like some help, we have a full suite of products and services and the expertise to help you get moving in the right direction. We are always willing to take a look at your financial profile to see if there are opportunities for you to save money. We love uncovering ways you can save money as much as you love saving money! Give us a call, and we can set up a financial checkup. It’s free, and if you’re in good shape, you’ll have the peace of mind that comes from knowing you’re on track.
Looking for a balance transfer Visa card that can help you pay off your debt faster and save you hundreds in interest? Click here for more information. The offer expires March 31, 2021.
Make sure to use all the benefits of your Choice Checking Account, including IDProtect, which offers a fully managed recovery comprehensive Identity theft resolution services, including identity monitoring.
Community Choice has a host of financial calculators and other resources available here.
Thinking of refinancing a loan? Give us a call at 877.243.2528 and we’ll help you get started.