Top tips to reduce the interest you pay

Interest rates are at record lows, with the Reserve Bank of Australia’s cash rate now sitting at just 0.25 per cent. But this is just a reference rate banks use between themselves to lend money to each other each night.

Banks do take the cash rate into account when lending money to their customers. But they also factor in many other things when they decide on the rate they will offer you.

Credit cards tend to be the most expensive way to borrow money. According to Canstar’s latest research, the highest interest rate a credit card charges at the moment is 24.98 percent, while the average rate is 13.76 percent – both rates are a long way above the cash rate.

The reason credit cards have such high-interest rates is because the loan is unsecured. This means it’s not underpinned by an asset, in the way a mortgage is underpinned by a house. If the borrower can’t pay the money back, the lender can sell the house and recoup most of the money it has lent. In contrast, credit card companies can’t sell the purchases you’ve made on their card to get their money back if you can’t make the repayments on the card. That’s why the rate they charge is so much higher than for other loans.

There are a number of ways you can manage the interest you pay on your credit card. One option is to pay the balance off in full before the end of the interest-free period. That will reduce or even eliminate the amount you pay in interest. But be aware how the interest-free period words. Many cards have a 55 day interest-free period, which starts on the first day of the statement period. If you buy something on day one, you have 55 days to pay off the purchase without incurring interest. But if you buy something on day 50, you only have five interest-free days before you’ll start being charged interest.

Another idea is to switch to a zero-rate or low rate card. A great way to reduce the rate you pay is to transfer a balance from a high-rate to a low-rate card and try to pay off as much of the balance as possible before the introductory period ends and the card’s rate rises. Check out all the great options on the ClearScore site today.

Taking out a personal loan is another popular way to borrow money. According to Canstar, consumers pay an average rate of 10.30 percent on this type of finance. Personal loans charge a lower rate than a credit card because you pay a set amount back on the loan each month, and lenders know when they will get their money back.

Some borrowers choose to transfer their credit card balance to a personal loan to reduce the rate they pay on this this money. Interested in a personal loan? Why not see the offers available in your ClearScore account.

Of all types of loans, mortgages usually offer the lowest rate. Figures from Finder’s latest research show the average variable home loan interest rate is 4.63 percent, which is substantially lower than rates you pay on credit cards and personal loans.

If you have a home loan, one way to reduce your interest could be to consolidate your personal loans and credit cards into your mortgage. This means negotiating with a lender to add these loans to your home loan.

There are also ways you could reduce the interest you pay on your home loan. If you’re a first home buyer, the higher your deposit, the less you need to borrow and the less you will need to pay off over time. Typically, if your deposit is less than 20 percent of the purchase price, your financial institution will ask you to pay lender’s mortgage insurance (LMI). This amount tends to be added to the loan principal, and you will pay interest on this money over the life of the loan. So if you can save a deposit of 20 percent or more, you will usually avoid the need to pay LMI and lower the cost of the loan and the interest you pay over time.

Having a good credit score is another way to manage the interest you pay. Some lenders can offer borrowers with a good credit score a more attractive interest rate, taking the view the borrower is more likely to pay back the loan according to its terms than someone with a lower credit score. So being responsible about paying off your loans can help to maintain your credit score and the interest rate you are charged. ClearScore partners with a wide variety of lenders. Check out what’s available in your account today.

It’s really important to know what your credit score is and be responsible with credit. Visit the ClearScore website check your credit score for free today.