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How to Use Interest to Your Advantage

From loans to savings accounts, interest plays an important role in your finances. Learn how you can use it to reach your financial goals here.

A jar of money and change on a desk.

Interest.

Let’s be honest; it’s not always that interesting of a topic.

Many of us don’t pay that close attention to it on a daily basis, even though it affects us in multiple ways each day, from the interest rates on our savings accounts to our mortgage – and yes, even the credit card that we used to buy a pack of gum the other day. Interest should interest us – especially when it comes to how it can help us achieve our financial goals.

National Financial Awareness Day aims to encourage consumers to learn more about finances and help guide them toward financial independence. Using interest rates effectively to your advantage is critical for reaching this financial milestone. We want to help you get there by teaching you to bank like anything’s possible. In this blog article, we will share insights into how you can get smart with interest. If you have any additional questions, contact us, and one of our dedicated team members will be sure to help you out.

Interest Rates: What You Should Know

As we hinted above, interest rates affect more areas of our life than we think. In essence, interest is simply defined as the cost of borrowing money. It plays a role with both loans and deposits.

When you take out a loan, you borrow money. On the amount you borrow, you pay interest. This interest on the loan is called the “cost of the loan.” The duration of the payback period on the loan includes how long it will take you to pay back both the initial amount borrowed and on the interest.

A savings account with a bank works similarly. When you open a new account, you deposit money with the bank. In effect, you are lending money by having a checking or savings account with a bank. On these accounts, you can earn interest. You earn that interest on your savings in a bank because you are giving the bank that they can lend out to borrow. Think of that interest as a little thank you.

So, if interest is the cost of borrowing money, how is it calculated?

The amount you ultimately pay results from three factors: the interest rate, the amount of money you lend/borrow (often referred to as the principal), and the amount of time to repay. There are different ways to calculate interest payments using various formulas, such as simple interest or compound interest, but this is the basics of how it works. Now that we understand how it’s calculated let’s transition to how you can use it to reach your financial goals.

How Your Banker Can Help with Interest

There’s the old investment adage that goes, “buy low, sell high”; mirror that with interest with, “borrow low, invest high.” The first review to make on your finances is your interest rates on credits cards and mortgages. These two sources impact consumers most frequently. Now particularly, with the federal reserve rate so low, it is a great time to talk to your banker about whether you qualify for refinancing your mortgage interest rate. By doing so, you could potential save money or reduce the term of your mortgage.

If you are paying interest on multiple different accounts, you could work with a banker to determine if you would benefit from consolidating your debt. For example, if you are making payments on several different credit cards and loans, and maybe paying less than attractive interest, consolidating your debt, and paying off all of these accounts would minimize your overall interest payments. Instead of multiple different accounts charging interest, there would only be one. It would help reduce the total amount you have to pay back over time and help you get to financial independence sooner.

Remember, you can also take advantage of interest rates to boost your savings. Talk to your banker about solutions like Certificate of Deposits, or Money Market accounts. These savings accounts generally reward you with higher interest rates than normal savings accounts. Higher interest rates mean your money works harder for you to reach your financial goals.

What Interest Products to Stay Away From

Just as there are ways to use interest to help you, there are always ways that it can hurt you. Avoid products such as credit cards with extremely high-interest rates or stiff penalties for late fees. Not only can these negatively impact the money in your account, but they can also damage your credit score when not managed properly.

Your credit score is critical indicator of how others view your financial trustworthiness. The higher your credit score, the lower the interest rate you’ll likely receive when borrowing money. This means that you’ll end up paying less than you would with a low or poor credit score. Sites such as Credit Karma and Experian offer free credit scores that could help you gauge your financial standing.

When you’re applying for a new line of credit, take the time to understand the offer terms. From the rates on credit cards to the payback period, be sure always to explore the possibility of getting the best deal for your unique financial situation. A few good questions to always review include:

  • Interest rate on outstanding principal
  • Penalties for missing payments
  • Opportunities for delaying or forbearing payments
  • Contact information for inquiries or questions

Whether you’re comfortable with coming into our branches or prefer to stay at home, we have the resources to help. Our lending professionals have years of experience and can help guide you into making your financial goals possible.

Looking for more granular help on your finances or budgets? We’re here to help with that, too. Give us a call or stop by one of our local branches to learn more about how we can help.