"I want to apply for a loan, but... how do I lower my credit costs?"

Borrowing money from a financial institution, whether it is in the form of a personal loan, mortgage, line of credit or credit card, means paying interest. The total amount of interest paid until the loan is paid off is called credit cost. Certainly we all want to pay as little interest as possible and there are ways to lower interest costs. Interest rates are a measure of the financial institution’s belief in your ability to pay them back. If you are perceived as a risky borrower, you will pay a higher rate than an individual who is considered to be less of a risk.

First things first…

Only borrow when you need to. At first glance this may not seem to fit in this article, but it does and here’s why. Beyond the fact that one should only borrow when necessary and only for things which either increase or have lasting value, limiting the amount of debt you carry can mean you qualify for a lower interest rate. If you have a substantial amount of debt already and you qualify for more, it will likely mean a higher interest rate as the financial institution may see you as a risk.

Now take a look…

Before you apply, look at the number of credit cards you have and their balances versus credit limits. As a general rule of thumb people carry between two and six credit cards/revolving credit accounts. For each of these make sure your balances are 50% or less of the credit limit. Maxing out your cards may signal to the lender you are living beyond your means and this can be seen as a risk.

And your past looks like…

One of the first things a lender will look at is your credit history. Establishing a good credit history will mean lower interest rates in the future. How do you do that? Pay your bills on time and in full. Pay down debt quickly. By paying more than your minimum payments or paying more frequently on a term loan you will naturally lower your credit costs as you will pay less interest. You will also signal to a lender you are serious about paying down debt.

Get shopping…

Before you make the decision to borrow, shop around for the lowest rate. There are ways to take advantage of interest rates by understanding your options. If you are buying a house check the mortgage rates offered by the financial institutions you currently deal with. Before you decide, get a pre-approval which will lock in your rate. As well, make sure you understand your options in terms of payments; can you make extra payments or pay more than once per month? These options decrease your credit cost. Car, furniture and other dealers often offer incentives to use their financing. Before you sign on the dotted line make sure you understand the total cost of the loan including hidden fees and interest. You may be better off going to your financial institution. Remember credit cards and lines of credit are often the most expensive ways to borrow as it is difficult to pay them off. Regardless of what you are borrowing for, a term loan which guarantees payments and the period in which you will pay it off is more often than not the way to go.

Whatever your borrowing needs or if you have any questions about your credit rating come in and talk to us. We C.U.™ so you can borrow for what you need.