Wednesday, April 23, 2014

Interest Rates

These days interest rates for the various types of credit such as credit cards, mortgages and auto loans are offered with largely different cost associated with them in the way of interest rate.

Credit card interest rate are currently significantlly higher than the interest rates of home loans with the average consumer credit card interest rate around 21% for individuals with fair credit according to research surveys.  With all the economic stimulus and relief programs offered by the government to assist in these arduous economics time why are the creditor not passing along this relief to consumers struggling to make their monthly credit card payments?  The reason is because unlike other types of debt credit card debt is not secured by any type of collateral so it is much more risky and therefore more expensive.  But thats not the only thing that has led to very high interest rates on credit cards.  The second cause of high interest rates is the 2009 credit card law designed to protect consumers by capping penalty fees has reduced creditor profits and in response creditors raised interest rates to recoup the lost income.    

Steps to Establishing Credit

Establishing Credit

With the substantial impact your credit score has on your financial flexibility,  buying capabilities and the cost of borrowed money its critical to meticulously establish, develop and maintain your credit history and its corresponding credit score.  Establishing your credit profile is the first step to building a stable and prosperous financial future.

1.)  The first step to establishing your credit is to create banking relationships by opening a checking and savings account and by maintaining these accounts in good standing it will then exhibit to lenders that you are responsible and capable of managing your money.

2.)  The next step when establishing your credit history is to then apply for a secured credit card which is a credit account with the credit line that is determined by the amount of your collateral deposit.  After obtaining a secured credit card most card issuers will then evaluate your account periodically and based on the accounts history offer to upgrade the account to an unsecured credit line. 

3.)  Once you have progressed to unsecured lines of credit it is best to start with retail store charge accounts since they tend to be fairly easy to get approved for.  Retail store such as Sears, Macy's, Home Depot, Walmart, Jcpenny's, TJMaxx and Lowes all offer easy to acquire charge accounts typically with a line of credit of $300 to start.  I would recommend obtaining at least 2 charge accounts and upon receiving your new card make an initial small purchase that you can payoff when the first statement arrives.

One critical mistake most make when establishing credit is closing old accounts when new ones have been opened.  A heavily weighted factor used to determine your credit score is the age of your oldest active credit account.  Most feel that when a new account with lower interest and better incentives is opened that they should close an account with high interest and few incentives since it will most likely no longer be used. However in doing so you then change the age of your oldest active account which will in effect significantly lower your overall score.

4.)  Once you have upgraded from a secured credit card to an unsecured credit card and acquired 2 retail store credit accounts the next step is to be patient and wait about 6 months before applying for any new credit accounts and alloow your history to age.  While doing so ensure all your payments are made on time and you are not utilizing more than 25% of your usable credit.

5.)  After you have allowed for some time for your credit history to age you can then look into applying for a credit card with the best interest rate or best rewards depending on what benefits you most based on your credit card usage. Upon obtaining the credit card of your choice you will need to then wait another 6 months to 1 year and again apply for a well suited credit card account.

6.)  Once you have successfully completed the previously defined process your credit score should be somewhere between 750 and 800 and you can then begin to explore more significant purchases such as a mortgage to purchase a home or auto loan to purchase a new car.

At this point your credit will be well established and how you manage it will determine its progression over time.