There are situations where you will be borrowing money. For example, if you need to buy a major appliance you will probably need to borrow the money by using a credit card or getting a revolving line of credit. Of course, you will need to borrow money to buy an automobile or a house. And you may be required to borrow money to handle an unexpected and unbudgeted expense like a big medical bill or an expensive automobile repair.
How much it will “cost” you to borrow the money
When you borrow money you will be assessed an interest charge. That’s the “cost” of borrowing money. The amount of interest you will be charged will depend on your credit history, which will depend largely on your track record for repaying the money you borrowed in the past and how well you’ve paid your bills on time. This is why it’s important to pay attention to your credit history and your credit score.
Do you know your credit score?
Your credit score is a three-digit number that basically rules your financial life. If you have a good credit score of 780 or above, you will be rewarded with low interest rates and will find it easy to get new credit. Conversely, if you have a credit score of less than 600 you’ll be charged higher interest rates and may find it difficult to get credit from some lenders.
How lenders view credit scores
This is how most lenders view credit scores.
Excellent Credit: 781 – 850
Good Credit: 661-780
Fair Credit: 601-660
Poor Credit: 501-600
Bad Credit: below 500
If you haven’t seen your credit score recently, you need to do so. It’s becoming increasingly easy to get credit scores free on sites such as CreditKarma.com and CreditSesame.com. If you have a Discover Card, you may be getting your credit score automatically each month. The three credit reporting bureaus (Experian, TransUnion and Equifax) usually provide credit scores free as well.
Be sure to also check your credit reports
In addition to knowing your credit score, it’s important to review your credit reports periodically. There are available free from the three credit reporting bureaus or on the site www.annualcreditreport.com. While reading credit reports is about as exciting as watching grass grow you need to review them carefully as they could contain errors that are negatively affecting your credit score. And if you find any it’s critical to dispute them with the appropriate bureau. All three have forms on their websites for this purpose but the experts say it’s much better to write a letter disputing the item and making sure to enclose whatever documentation would prove your case.
Comparison shop when borrowing money
One good rule of thumb is to treat borrowing money as if you were making a major purchase. This means you should shop around to get the best deal you can, which means getting a loan with the best possible terms. For example, the best deal in credit cards today is the 0% interest cards that offer from six to 22 months’ interest free. If you were able to qualify for one of these cards you could make that major purchase and then repay the balance over two, three or even four months without being charged a cent in interest.
If you need a personal loan or personal line of credit, you might be able to get an interest rate as low as 5.99% – if you have really good credit. However, it’s also important to consider the term or the length of the loan. The reason for this is simple. The longer the term of the loan the more interest you will pay.
The importance of the APR
When you’re shopping for a loan, whether it’s in the form of a new credit card or a personal loan, the important number to pay attention to its APR or Annual Percentage Rate. This is critical because it’s the total cost of the loan, including both interest charges and fees described as a yearly rate. In fact, APR is one of the quickest and easiest ways to compare loans. For example, if you are considering two personal loans and one has an APR of 7.99% while the other has an APR of 8.50%, you can just about bet that the one with the 7.99% APR will be a better deal.
Always pay more than the minimum amount
Finally, the biggest dirty secret of credit cards is that the card issuers want you to pay just the minimum amount each month. In fact, this is how they make their money. If you have a rewards card with cash back, points or airline miles and pay off your balance at the end of every month, you’re actually costing the card issuer money. But if you pay just the minimum amount and rollover the rest of your balance into the next month you will fall victim to the power of compounding interest and could literally end up paying more in interest than the amount of money you had borrowed.