/ Finance 101

How credit utilization can get you a better interest rate

As borrowing is a part of our lives for so many things (like to buy a house or a car), we’re all bound to pay interest at some point. Luckily, we’re here to give you some tips that can help you access a lower interest rate and as a result, pay less interest fees over the course of your loan term.

Man calling his credit card issuerFirst, you need to understand the different factors that affect the interest rate on a loan:

1) Individual factors like your credit score and the loan product you choose

2) Economic factors like inflation and the prime lending rate

For the most part, we don’t have control over economic factors. However, we do have control over the individual factors that affect our interest rate. By focusing on these individual factors, you can access a lower interest rate on loans and credit in the future.

4 tips to pay less interest fees on your loan:

1. Lower your credit utilization

Did you know the amount of credit available on your credit card can affect your interest rate on future loans? This is called your credit utilization. As a general rule, you should use less than 25% of your available credit to improve your credit score. Over time, improving your credit score will give you access to lower interest rates.

For example, if your credit limit is $1,000, try to keep your balance at $250 or below. This can be difficult to maintain when it comes to purchasing high-ticket items like a washing machine or mattress on your credit card. But, you'll get there if you pay off as much of your balance as you can each month.

Tips to lower credit utilization:

  • Monitor your credit report

Most credit card issuers report your payment activity to credit bureaus on a different schedule than your payment due date. So even if you're paying off your balance in full each month, your credit score can still be affected by your credit utilization at the time it gets reported. Find out when your balance is reported to credit bureaus and pay down as much as you can, even when a payment isn't due.

  • Set up alerts to help monitor your balance

Keep track of your 25% credit utilization by setting up a balance alert notification that can be sent to your phone or email. We recommend setting the alert to notify you when you've reached 20% of your available credit. That way you have some extra time to take action.

  • Make regular payments

Increasing the frequency of payments on your card is an easy and effective way to bring your balance down. Try setting up biweekly automatic payments with your bank to help pay off your credit card debt quicker.

  • Save up for big purchases instead of using credit

It's not always possible to save for big purchases, especially if it's an emergency repair or a broken appliance. But if you can, plan ahead and save the money you'll need so you can pay with cash instead. A good rule of thumb is to avoid using your credit cards for purchases unless you’ll have the money to pay it off by the time your bill is due.

  • Consolidate your debts

If you're juggling multiple credit card bills a debt consolidation loan can help you take control of your finances. You'll use the loan to pay off your existing debts so you only have one lender to make payments to. On top of this, a debt consolidation loan is designed to set you up with a repayment schedule you can manage, allowing you to actually pay down your balance over time.

2. Limit credit inquiries

Too many credit inquiries can have a negative impact on your credit score. The reason? Lenders may interpret this as “credit-seeking behavior.” You may be shopping around at different lenders for the best interest rate, but this can actually be counterproductive. Lenders will want to be sure that you can afford the payments on your new loan, so they might assume that you’re going to follow through with any inquiries on your credit report.

Instead, be strategic when it comes to credit inquiries. Most lenders (Fairstone included) will offer you a quote that can help you estimate how much money you could be approved for. These quotes often use a soft credit check, meaning it won’t show up as an inquiry on your credit report. If you’re happy with the quote, the lender will then have to do a hard credit check. But for the most part, you should be able to shop around with different lenders if they offer a soft credit check.

Interested in learning more? We give you an in-depth comparison of soft vs. hard credit checks in this article.

3. Show lenders you can pro-actively manage your debt

Your payment history makes up a significant portion of your credit score, so it’s important to stay on top of credit card and loan payments. Limit any late or missed payments by setting up payment reminders, choosing automated payments and aligning payment deadlines with your payday.

If you have the option to choose your payment frequency, make sure to choose the one that works best for you. Some people like the regular schedule of biweekly or semi-monthly payments, but other people like the simplicity of monthly payments since they only have to remember one payment deadline a month. There’s no “right” or “wrong” payment frequency, all that matters is what works for you.

You can even take it a step further and pay more than your minimum credit card or loan payments. Even if you can afford to pay an extra $10 per payment, it shows lenders that you are pro-actively managing your debt. Not only will this help you pay down your debt faster, but it will make a positive impact to your credit score over time. And, the better your credit score, the more likely you’ll be able to access a lower rate.

4. Choose a secured loan

Having a favourable credit score can help you access lower interest rates, but it’s not the only way to help you pay less interest fees on your loan. Choosing a loan product, like a secured loan, can help you access lower rates as well.

What is a secured loan?

A secured loan is backed by the value of your house. Securing your loan with your house adds an extra layer of security for the lender (your lender could assume ownership of the house if you don’t pay back the loan). Because of this added security, your lender has greater confidence that you’ll make payments and offers you a lower interest rate since there is less risk they won’t be paid back.

Educate yourself on credit and interest rates

Even when the cost of borrowing seems high, you can make small changes that will improve your credit score and help you access a lower interest rate. Improving your credit score won’t happen overnight, but small changes will add up over time. The best thing you can do is to educate yourself about what affects your credit and interest rate.

Check out these resources to learn more:

Interested in a loan? Try our free loan quote! In just a few minutes, we’ll tell you how much money you could qualify for and what your payments might be. No obligation and no impact to your credit score.

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This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.

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