Millions of Americans use credit cards on a regular basis in order to pay for everyday items and activities. However, using credit cards is an easy way to fall into debt if you are not careful about paying those credit cards off on a monthly basis. The majority of credit cards charge a fee on the balance that you leave on your credit card each month. This fee is called an interest rate and it is based on a percentage of the amount of the balance.
Interest rates on credit card vary wildly from introductory zero percent offers right up to cards with crazy interest rates such as forty percent designed for those with very bad credit ratings. In order to avoid having to pay this interest rate, it is important to pay your credit card off each month.
Interest rates are charged on an annual basis, but credit card users are charged a percentage of that interest rate each month until the balance is paid off. For example, if you charge $1,000 one month and paid your credit card off, you would not have to pay any more money than $1,000. However, if your interest rate was 13%, then you would have to pay an extra $130 a year for the initial $1,000 charge.
If you have had enough of paying interest on your ccredit cards and want to avoid paying interest follow these simple tips:
Credit Card Balance Transfer: When you use a credit card, you always have the option to transfer the balance of that credit card to a new credit card with a lower interest rate. A credit card balance transfer is a simple way to avod paying interest on your credit cards. However, make sure that the credit card that you transfer your balance to does not charge a fee for the balance transfer (or that your original credi card does not charge a fee).
Don't forget the doing a balance transfer does not get you out of debt or mean you can avoid paying the money back. You will still have to pay back the money that you borrowed. However, you may be able to avoid paying high interest rates with a lower interest rate credit card.
Debt Consolidation: Many credit card users have too many credit cards that they need to manage, including everyday credit cards and credit cards for specific stores. To make your finances simpler to manage and create just one bill each month you could think about debt consolidation. A debt consolidation program is a program through a third party that makes it possible for you to consolidate all of your credit card bills into one so that you can manage and predict your monthly payments. When you use a debt consolidation program, you will have to pay a set monthly payment, which puts you on a payment schedule that should match your income and current financial situation.
Ask for an Extension: If you have enrolled in a credit card program that has a low interest rate, it's always okay to ask the credit card company for an extension of that low interest rate. When a low interest rate credit card offer is set to expire, simply call the credit card company and ask for an extension. If they do grant an extension be sure to ask they won't charge you extra fees for this service.
It can be a challenge to avoid paying interest on your credit cards. However, depending on the amount of credit card debt that you have accrued, your interest could cost you thousands of dollars each year. Therefore, a little legwork may go a long way to help you save your money and avoid paying high interest rates.
The same way, if your credit card company charges higher interest rate than your bank, you should hire money from the bank instead. It's the principle of appeasing the lesser evil. The thing is why would any bank want to lend you money at low interest?
Now, we need to resort to psychology here. Say someone comes to you and says, "Lend me money I have a huge business that can have 100% yield". Say another person comes and says, "Lend me money, I got a standard real estate business that yields 20% per year". Which person would you give your money to? The one giving 100% yield?
Obviously it's not obvious. Why? Because you don't give a shit on the sort of yield he'll get.
All you care about is how much from that 100% yield will he share you?
If both say that they will share you 10%, which one will you choose? The safer investments. Usually higher yield investments are riskier. So, when both say the will share you 10%, you will choose the business yielding 20% per year. That's why Banks love lending money to low yield real estate rather than highly profitable silicon valley business start up. There is another even more important reason, which I'll explain later.
You don't care how much yield a businessman will make. You care what your share is. That and the probability that they won't pay your loan.
The same way, Banks lend money to businessmen at pretty much constant interest rate. If the businessmen make a lot of money, the Bank makes 10% interest, if the business makes less money, the bank also makes 10%. So banks don't care how much money businessmen make.
Banks only bite the bullet when businessmen go bankrupt. The same way, when a bank considers a loan to you, they don't care how brilliant you are. They're only interested whether you will pay the loan or not. If they feel secure you'll pay, they lend the money. Simple?
Now, how do we make bank feel safe that you'll pay? Collateral. You see, secured debt are debts where banks can seize something if you don't pay. You'll usually get lower interest rates this way. Collateral makes banks feel safe in lending money for you. This is the second reason why banks love real estate. Real estate loans always come with collateral that will minimize banks' problem when the debtor ditches.
Trivia: Why Credit Card Interest Rate is Higher Than Mortgage?
Answer: When you lend money on interest rate basis, all you seek is security. To make a profit, your interest rate should be higher than the interest rate your lender gives. However, that's not the only factor. You need to compensate for the probability of default. Your interest rate should be high enough so that even if say, 10% of your debtors are defaulting, you still earn a profit.
Different Point Of View: Credit Cards, unlike Mortgages, are unsecured by collateral. So banks are not motivated to lend money through unsecured loan to unsecured debt. So how do we motivate them to lend money? By agreeing to pay higher interest rate.
Morale: As with anything, after a bunch of regulation, the market will sort of take care of it. More pain for a bank usually leads to bigger share for it in another form.
As usual, I put a few simulations for this advance strategy. I also put an in-depth analysis to explain why this advance strategy is possible. You should compare the simulations of this strategy with the simulations of the basic strategy
Conclusions
Is it for you? Well, I won't jump to conclusions. If you're determined to pay, go ahead.
However, if you're not, this can make you loose your house. You see, that's the downside of collateral. It's a secure debt so you cannot hide behind bankruptcy laws to prevent banks from taking it.
I'll explain more about bankruptcy later.
However, if your debt is not neck deep and you obviously can pay, this is obviously the way to go. The worst is you live on welfare, right? Doing this right can help shorten your loan payment period or cheapen your payment.
Loan interests go high because banks are taking risks that some people won't pay their loan. Hence, by paying high interest loan, you are paying the loan of those who don't feel like paying loan. Maybe you think it's unfair that some people don't pay their loan expecting you to pay for it. However, for all the bank knows, you are potentially one of those people.
Unless you can convince your bank that you're not likely to default on your loan, the bank will think that you're a potential defaulter.
You see, unless you have a credibility or collateral, the bank will automatically think that you are partially a defaulter. If the default rate in your country is 20%, for example, then the bank will look at you as if you've decided to default (on average at least) 20% of your loan already.
Here, the bank will give you an interest rate where on average, the bank still gains its usual low interest rate plus some amount to compensate for the extra risk.
By signaling to the bank that you're not one of them through collateral, you only pay interest for what you owe rather than paying for those who don't pay their loan. Hence, you get cheaper interest rate.
Both Richard Greenwood & Jim Thio are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Richard Greenwood has sinced written about articles on various topics from Debit Credit Card, Credit Card Offers and American Express Card. Richard Greenwood is director of click4credit.com.au which compares and. Richard Greenwood's top article generates over 135000 views. to your Favourites.
Jim Thio has sinced written about articles on various topics from Science, Insurance and Finances. Jim Thio is a silver medalist in International Physics Olympiad.He uses his Math skills to provide free financial, business, and marketing advices in