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Financial Literacy

Financial Literacy

Home Finance Credit and Debit Interest Rates

Interest Rates

Interest rates are what banks, credit card companies, and other folks charge to lend you money. You can borrow money, yes, but it'll cost you.

Pro tip: pay attention to interest rates.

The lower your interest rate, the more affordable your borrowing and the less money you'll have to pay overall. Even a half a percent or so can mean thousands of dollars in savings over time.

So how can you get the best interest rate? Your interest rate will depend on a few things.

The Type of Loan

All loans charge some sort of interest, but how much they charge will depend on the type.

When you get a mortgage, for example, you're going to be getting a fairly low interest rate. That's because The Man can always come and take away your house if you don't pay your mortgage on time. There's a pretty decent chance that they won't lose money on the loan, and they're going to be making a tidy bundle because the amount you're borrowing is so big.

With a credit card, though, you don't have any collateral: there's nothing backing up the loan. If you decide to run off to Spain to join the circus (because you've always had a thing for Spanish circuses) and default (= don't pay), the credit card company can try to chase you down…but probably won't. They'll have to write off what you owe.

Credit card companies are billion-dollar businesses, so they can afford it, but they get grumpy about it. They also want to protect themselves against deadbeats, so they charge high interest rates. High interest rates make them even more money and make sure that if someone does default, they have the extra cash to cover it.

Your Credit History

Do you have a history of skipping town when rent is due? Or do you pay your credit cards on time every month? The more you can show that you are good with money and good with repaying what you owe, the more likely it is that credit card companies and other lenders will offer you a good interest rate. They want your business because they're relatively sure you're going to pay them back.

Your Ability to Repay

Virtually all loan applications will ask how much you make and will want some employment verification. If you have a long history of gainful employment and you can actually pay back what you owe, you're more likely to get a good interest rate; again, you're unlikely to skip town and leave the lender hanging. If you make $3,000 a month and have a tiny $500 credit card limit, the credit card company assumes that you can easily pay that off; since you're a smaller risk, they may be willing to give you a better interest rate.

So how much can you expect to pay in interest on a credit card? 

  • If you have pretty good credit, expect to pay 4% less than someone with lousy credit.
  • If you have excellent credit, you may be able to score a pretty decent card with a 12–14% rate.
  • If you're the typical person, your rate is probably closer to 17%.
  • If you have some major financial skeletons doing the tango in your closet, it's not unusual to have credit card rates of 20 to 25% or more. If those are your rates, it means that the bank is kind of side-eyeing you and not trusting you to pay back your loans.

BTW, interest rates aren't all you have to worry about—especially with credit cards. Credit card companies sometimes charge annual fees or other fees…just because they can. Always read the fine print and understand what you're paying. There may be some sneaky surprises in there—and they're way less fun than the meatloaf surprise in the cafeteria.

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