The Feds recently announced that interest rates may remain low until 2023, potentially longer depending upon the economic situation. This is good news for the borrowers among us. This is not so good news for those of us depending on the income from investments and savings to manage living expenses.
Those depending on interest income will need to reconcile the willingness to accept more risk with the ability to manage the lower-income being receiving in savings accounts, CDs, and other interest-bearing instruments. There are some options available, but that is not the subject of this particular post.
We want to talk with the borrowers out there. Many of you are living with mortgage debt and with car, student, and other personal loans. Many are carrying credit card debt. We have watched individuals try to manage their debt by taking on home equity loans, debt consolidation loans, refinancing mortgages, and any number of other opportunities. Those are who we want to address in the following posts.
With the lowering of interest rates yet again and the anticipation they will remain low for the next several years, now is the time to review your current debt and consider ways of reducing the cost of that debt. Certainly, if the current pandemic has impacted your financial picture, you may be unable to activate any of the recommendations below.
Your best option at this point is to remain in contact with your creditors to make them aware of your situation and to conserve cash as much as possible.
Our first suggestion – know your FICO score. Many of you are getting that notification through Credit Karma, Credit Wise, Credit Sesame, or any number of other services, often tied to your credit card issuer. If your score is above 740, you can proceed to the next step. A 740 score indicates you should be able to get the best possible interest rates from most issuers. Something slightly below 740 means you might be offered a slightly higher interest. Anything below 600 means it might be difficult to obtain credit at all.
If your FICO score is below 740, we suggest you to www.annualcreditreport.com and obtain a copy of your credit report. It is a good idea to review your report annually, even if you have a good credit score. This report will cost you nothing to obtain. You can elect to get it from one of the reporting agencies or all three. Review the report and fix any problems you see to raise your credit score.
Make sure any loans or credit cards that are not being used are closed. The availability of that credit will impact your score. When you close out a credit card, you may see a temporary decline in your credit score, but it can result in improvement after a few months. If there are errors in the report, get them fixed. If late payments are being shown that were not late, work with the creditor to fix that. If there are outstanding debts that have been paid, especially old collection notices, get that information corrected. Whatever you can get fixed, work to do that. If you had an unusual situation and want to document that in your report, you can. Be aware that most creditors are merely getting your credit score and not looking through the entire report. Reviewing your report can also allow you to spot potential identity theft issues.
If the report is correct and your FICO score remains below the 740, work on raising that score over the next six to twelve months. With the anticipation that rates will stay low for a while, you do have the time to improve your score. Improve your score by making sure to make payments are timely. Improving your debt to income ratio can increase your score. This means getting the debt paid down by making extra payments or getting a loan off the books getting it paid off. This can mean increasing your overall income through working overtime, taking on a second job temporarily, or maybe starting a small business. Get a double impact by taking that extra income and using it to pay down debt.
For some, the low score is because they are not showing they are managing enough credit. If you have credit cards you are keeping for emergencies, it might benefit you to use it occasionally and pay the bill in full when received to avoid any interest charges. Taking out a small personal loan or car loan may work to your advantage in increasing your credit score.
I would like to say if you do not think you will ever need to borrow money, that you should not worry about what your credit score is. However, insurance companies are factoring in credit scores when they determine your premiums. Some employers are unwilling to hire individuals with lower credit scores. Your credit score is used for more than the determination of your interest rate on debts.
If you have or once you have gotten to the point of having a good credit score, it makes a lot of sense right now to review those interest rates. We see mortgage interest rates around 3.5%. We see car loans around 2%. Many other loan types are now advertising lower interest rates.
It is imperative – to benefit from the lower interest rates, you should not increase the term of the loan. If you are 5 years into a 30-year mortgage, consider doing a 15 or 20-year mortgage. If you are a year into a 5-year car loan and want to refinance it, do it as a 4-year loan. Making ½ of the payment every two weeks (the bi-weekly option) can further shorten that loan term.
Review your credit card interest rate. Talk with the card issuer to see if they would be willing to lower your rate. If they will not, consider other issuer’s cards. If you do not carry a balance on your credit card, the rewards program may be more important to you than the interest rate. It is rarely advantageous to pay an annual fee for a credit card.
Student loans have many repayment options. Consolidations of loans may not be the best option. If you consolidate, you are going to have a blended average rate. If your thought is you will be paying extra to get the debt decreased, having the opportunity to make extra principal payments on the highest interest rate loans will allow the overall debt to decrease quicker.
Where can you find lower interest rates? Two sources I often use are nerdwallet.com and bankrate.com. There are calculators on the PwPpartners.com website if you want to see the savings you can obtain from a lower interest rate.
Reducing your debt through lower interest rates that allow for quicker payoffs is undoubtedly advantageous. Take the funds from those reduced payments and use them wisely. Pay debt off quicker. Save for your next car, home improvement project, or other long-term needs. Beef up retirement savings. Allocate this savings. Do not allow it just to be absorbed into your spending plan absentmindedly.