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What is a Secured Credit Card?

You might be wondering what a secured credit card is, and how they’re different from the norm. Maybe you’re getting ready to buy a house or car, but you’ve been denied, based on poor or no credit history. Even just getting utilities or cell phone service can be depressing if you don’t have good credit. Having poor credit can be emotionally painful and can lower your self-confidence.

Whether you’re starting out from scratch, or you’re making a comeback from bankruptcy, getting a secured credit card can be extremely useful in building your credit.

In this article, we’ll examine secured credit cards and how they work. By the time you finish reading this post, you’ll know all about secured credit cards and whether they’re right for you.

Why Get a Secured Credit Card?

Maybe you’re shopping for your first apartment, or you’re a new immigrant to the U.S., and you need to prove credit worthiness, but you have no credit history. Or perhaps you’ve had a divorce or bankruptcy, and you need to rebuild your credit. Either way, a secured credit line will help.

When you open a secured credit card, the bank will ask you for a deposit as collateral. Are you worried about whether you’ll be approved? Fortunately, many banks won’t check your credit when you apply because there’s much less risk when you’re borrowing your own money.

The biggest reason to get a secured credit card is to improve your credit score. After you show that you can borrow money responsibly, you’ll eventually be trusted with an unsecured line of credit. You might even score a better interest rate too.

One great thing about secured lines of credit is that they force you to limit spending. You’ll only spend what you have, which is good training for anyone who is new at borrowing money.

How to Choose a Secured Credit Card

Your credit line is whatever amount you give the bank for collateral. It could be as little as $300 or as much as several thousand. It all depends on the amount of the deposit you make, minus bank fees.

The key to finding a secured credit card is finding a bank that will report to all three credit bureaus: Equifax, Transunion, and Experian. This is crucial because a lender you want to borrow money from in the future may only use one bureau to check your credit. So, it is essential that each credit bureau has your new secured credit information.

Other things to check are fees and interest rates. Most cards will have an annual fee, but you may be able to find one that doesn’t, or one that has a lower cost than the others.

Your local credit union might have a reasonable deal, or you can try asking a big bank. Another option is to go online.

How to Use Your Secured Credit Card

Secured credit cards aren’t to be used forever. You’d use it only until you raise your credit score, and that could happen in as little as 45 days. You’ll want to get rid of your secured credit card as soon as you are eligible to get an unsecured card because they tend to have high-interest rates and annual fees. Plus, you’re being charged to use your own money, so it will not get you far in the long run.

The best way to raise your credit score quickly is to spend less than one-third of the credit limit and pay it when the monthly bill arrives. Leaving 70% of your credit untouched will help boost your Fico score because you’re using less of your available credit.

However, it’s a good idea not to pay the card off completely. For example, if you have a $300 secured credit line, consider leaving a balance of $2-10 to show that you’re actively using the card. Then do the same next month. You’ll see an improvement in your credit score after a month or two if you continue using this method.

Final Thoughts

Getting a secured credit card is an excellent way to build credit and pave your financial future. You’ll be more able to get an apartment, car, or house, and possibly at a better interest rate.

If you’re trying to raise your credit score quickly, remember never to pay late, not to use more than 30% of the limit, and to always leave a small balance on the card.

Are you considering using a secured credit card to establish your credit or raise your score? What has been your experience with using secured credit cards?

What is a Second Chance Bank Account?

Have you ever tried to open a bank account and found you’ve been turned down? Not for a credit card, but a simple deposit and transaction account. If you have a poor credit history, you’ve had a lot of overdraft fees in the past, maybe bounced some checks, this can lead to banks rejecting your application for a bank account.

Just like trying to open a credit card when you have a poor credit history, you need a product that will help you rebuild your reputation, as well as to allow you to continue with your day to day banking. This is where Second Chance bank accounts come in.

Downsides to Second Chance Bank Accounts

Before looking at the positives, it’s important to know there are some downsides to Second Chance bank accounts. They generally have a minimum opening balance, though nothing particularly large, $25 – $50 is average. They also have much higher fees than many accounts, ranging from $10 set up fees, to $10 – $20 monthly maintenance fees, an early account closing fee and even ‘dormant’ account fees if you forget to close the account after it has served its purpose.

Purpose of a Second Chance Bank Account

While Second Chance bank accounts may come with higher fees and stricter conditions, they do not do any background checks before allowing you to open the account. While most accounts use ChexSystems to screen applicants, Second Chance accounts don’t. This means if you’ve recently been turned down for a regular account, Second Chance accounts give you a chance to rebuild your banking reputation, just like Secured Credit Cards give you a chance to rebuild your credit score.

It’s important when using these accounts to avoid any overdraft fees, excess withdrawal fees or stop payment fees. If you do incur these fees, make sure you pay them promptly. The better your financial ‘behaviour’ is while using a Second Chance bank account, the quicker you will be able to switch to a fee free account and keep your money in your pocket, not in the banks.

Finding a Second Chance Bank Account

Finding a Second Chance bank account that suits your needs can be tricky, because they are not often offered by the major banks. While these accounts come with extra fees compared to the usual accounts, banks typically make less money from them because they have smaller account balances. The major retail banks are often unwilling to deal with this kind of account because the risks outweigh the benefits.

Instead, you can usually find a second chance account with your local bank, or a credit union. Because these are smaller business they are more willing to take risks to get your business, and have greater flexibility when dealing with unusual circumstances.

While a Second Chance account may not be the best deal, it is a useful product for rebuilding your banking reputation and getting you back on your feet. Most people who use a Second Chance account are about to ‘graduate’ to a regular bank account within a couple of years even if they still have a black mark in ChexSystems. While you might not be able to open a regular account with a different bank, many banks and credit unions will ‘upgrade’ your account to a regular one. If you’ve been using a Second Chance account for a couple of years, it can’t hurt to ask.

How to Choose the Right Car Insurance

You want the best car insurance that fits your budget. However, some of the terms are confusing which might keep you from saving the most money possible.  You don’t want to end up stranded after an accident, but you also don’t want to pay an arm and a leg for coverage you don’t need.

In this post, we’ll discuss some ways to get the right coverage that can save money instead of costing you big.

Choosing the Coverage that Fits Your Needs

You want to pick a policy that will cover you in an accident, but you don’t want to pay for coverage you’ll never use.

Here are the three main types of coverage:

Liability. This type of insurance covers damages to another person and their property when you’re responsible for the accident.

It’s divided into two parts: Bodily injury and property damage. The bodily injury portion covers the other person’s medical expenses and any pain and suffering, and the property damage covers the other party’s property.

Every state except for New Hampshire requires this type of insurance, and you must purchase the minimum amount for your state. Each state has a different minimum amount, so you’ll need to examine your state’s insurance requirements.

Collision. This type of insurance covers your car when it collides with another object or when it rolls over. It doesn’t include theft, vandalism, hitting an animal, weather, or fire-related incidents.

It’s a good idea to have this coverage if your car is new, but if you have an older car, it might not be worth it. For instance, if your vehicle is worth $3,000 and  coverage costs you $600 per year, it could be worth it to save emergency money in a bank account instead. The insurance company’s total loss settlement probably wouldn’t give you the full $3,000 anyway. Plus, you’d have to pay a deductible of $250, $500, or even $1,000 to fix the car.

Examine your vehicle’s value at Kelley Blue Book to decide whether to buy collision insurance. You might find that you can save money for repairs or even buy another car rather than fork over your hard-earned cash to an insurance company.

Comprehensive. This insurance covers theft, vandalism, hitting an animal, weather, and fire-related incidents. It doesn’t cover collisions, injuries, or fatalities.

Comprehensive may be another optional insurance if your car isn’t worth much, or if you have enough money to cover incidents. However, you might decide you need comprehensive insurance if you live in a climate where weather frequently causes damage.

Check your car’s value and your circumstances to determine whether you need this insurance. You may be able to save money by electing not to have it.

Note: If you’re making auto payments to a bank or finance company, they’ll probably require you to have all three coverages. They are referred to as the lien-holder for car insurance purposes. You’ll most likely need to fulfill their insurance requirements until you own the car and your name is on the title.

Which Deductible is Best?

After you select the type of coverage, the insurance company will ask you to choose a deductible. The deductible is the amount they’ll ask you to pay when you file a claim. Your insurer will ask for this payment over the telephone before beginning any work on your case after an accident.

Insurance companies offer deductibles at $250, $500, or $1000. The lower your deductible, the higher your monthly payment, and vice versa. A high deductible will lower your monthly payment, but you’ll be expected to pay the larger sum if you have a claim.

You could save money on your insurance by selecting the larger deductible and stashing away the amount in a bank account.

Another way you can save money on insurance is by bundling insurances like auto and homeowner’s coverage with the same company. You could also save by placing multiple cars on the same policy, paying the six-month or annual fee instead of monthly installments, or by installing an anti-theft system.

Final Thoughts

Be sure to go with a reputable insurance company. Investigate their reputation through user reviews and your state’s insurance department.

Have you been looking for the right car insurance? What kind of insurance coverage do you think you’ll purchase for your vehicle?

Budgeting Apps that Will Make Your Life Easier

Have you ever tried to keep a budget? It starts out with the best of intentions, but then you lose track of your notebook for a couple of days and you can’t for the life of you remember if breakfast was $8 or $9. Or maybe you do a great job of recording everything but at the end of the month you can’t work out where your money went, your tallies are a mess and you can’t figure out if you remembered to pay rent or not.

There’s an app for that. A few in fact.

You Need a Budget

You Need a Budget (YNAB) has an annual subscription fee of $50. It might sounds counterintuitive to spend when you are trying to save, but YNAB brags that on average most users save $200 in their first month of use and go on to save over $3,000 in nine months. If your money is completely out of control this might be the one for you.

YNAB doesn’t do anything super fancy, it tracks your income and expenses just like any budget should. However it runs some nice maths in the background for you, so you can see at a glance what your monthly utility bills are, even if you pay quarterly. YNAB tells you to set aside money each month so when the bills come, you’re ready to go. Of course, it can’t force you to save – that part is still on you.

Personal Capital

If YNAB is the basics that you need to get started with your finances, then Personal Capital is the master class that will last you from now till you’re raking in your third million. Personal Capital is free to use, and not only does it show you your spending category by category, track your income and give you regular spending reports, it tracks you debts and investments as well.

Personal Capital can hook into all your banking systems, track your investment returns, uncover any hidden fees and even help you plan for retirement. From your first pay check to your last bill, Personal Capital has your back the whole way.


Mint is another free all in one tool that helps you make a budget you can stick to, track your upcoming bills and will even keep you on top of your credit score. Mint will also track down fees that are eating away at your investments, throw out warnings when you’re going over budget and will even let you pay bills direct from the app.

Next to the budgeting and investing assistance, Mint also offers credit card analysis tools, a selection of brokerage accounts to review and tips on new savings accounts to try. They are hitting every side of the personal finance world and they’re doing it well.

While you might feel wary about handing out your bank details to a third party, they are all well known, well established companies with super stringent security protocols. You’re probably safer giving these guys your details than logging into your bank directly, that’s how serious they are. If you’re looking to get ahead on your finances, pick up a budgeting app and see what difference it makes to you.

5 Lucrative Side Jobs to Work During College

Getting a side job during college is one of the best ways to get extra money. The cost of tuition is on the rise, with students paying an average of $19,548 in education, room, and board each year, according to Discover. And there are other costs like having a car and buying books. Even if you’re not in deep student debt, having income from a side job will make life easier.

Ideally, you’d work in something relating to your degree. If you’re majoring in Chemical Engineering, you could work in the lab helping other students. If you’re getting a degree in Kinesiology, you might try working at a gym.

However, it’s not always possible to get something closely related to your major. The important thing is that you have the cash flow to make the road ahead easier. Here is a list of five lucrative jobs that you can do during college:

1. Social Media Manager

How would you like to make social media posts and get paid for it? Being a social media manager might be a job you haven’t thought of, but it makes total sense if you like to hang out online on Facebook, Twitter, and Instagram.

Companies across the globe need social media marketing in a big way. It’s a must-have, but not every company is willing to hire an in-house employee to sit in an office and write posts. They hire freelancers to write posts, manage Facebook groups, and build followers.

Pay is $20-$30 per hour, and will probably require at least 10 hours per week. The best thing about this work is that it is ongoing and you can do it from your laptop before or after study time.

2. Bartender or Server

If you’re over 21, you can work as a bartender. You can make an average of $16.71 per night serving drinks, according to Payscale. Making drinks for people builds fantastic experience in customer service and solving needs. You’ll have to think on your feet, and it is tough work, but you can make significant money on nights and weekends.

If you haven’t reached the legal age, try making your tips by serving tables. Bringing food to people is another excellent resume-builder because employers love to see that you’ve worked in customer service. Waiting tables is hard work, but you’ll love having the quick cash that tips provide.

3. Tutor

Being an on-campus or online tutor is a fantastic way to practice your skills while earning cash on the side. Campuses will pay as much as $15-20 per hour for tutoring subjects like Algebra or English.

Working as a tutor online may give a lower hourly wage than in-person tutoring, but you’d also have the freedom of working from your laptop. Two of the best online tutor sites are Skooli and

A third option is to make and post flyers offering private tutoring to college and high school students. Many students have trouble keeping up in certain subjects in which you might excel. Math, engineering, English as a second language, and foreign languages are all subjects that people frequently need help learning.

4. Sell Clothing on eBay and Other Online Sites

This job is bound to be a favorite for anyone who loves shopping and fashion. It’s not a job where you’re clocking in anywhere, but your results are based on your performance, just like any business.

Selling on online retailers like Amazon and eBay is one of the most lucrative online side hustles you could have if you’re knowledgeable about high-end fashion brands.

Do research on which brands sell well online. Then go to your local thrift stores and upper-end second-hand shops like Plato’s Closet.

You’ll need to take pictures and write some creative product descriptions, but your items can pay off. Your total expenses will include the cost of the product, shipping fee, eBay fee, and usually a PayPal fee. You can score a nice profit if you calculate your sale price and profit correctly.

Don’t like fashion? Try buying and selling textbooks or graphing calculators instead.

5. Brand Ambassador

Brand ambassador is an exciting job that will pay you a good wage to represent a brand on or off campus. Companies are in constant need of temporary labor to be on site to promote their products, create awareness, or to hand out freebies.

The jobs are usually easy, but will usually require you to drive to a location unless it’s on campus. Most of these jobs require little or no experience and the hours are typically evenings and weekends.

The best sites to find brand ambassador jobs is Indeed or Snagajob.


Finding a lucrative side job during college is one of the smartest things you can do to minimize debt and make your college experience more comfortable. Are you looking for a job to do during college? What side jobs have you worked?

How to Set Up a Family Budget

If you’ve been living without a budget for a while, you might be experiencing dread when it comes to looking at finances, especially if you need to plan for your family. You should already know that you need a budget regardless, but it’s a bit different when kids are thrown into the mix.

Making a family budget doesn’t have to be painful, and it could even be fun once you get the hang of it. Budgeting is not about making your family’s lives harder. Rather, it’s about planning so that you have money for all the things you want to spend on. In this post, we’ll look at some different ways to budget, talk about how to set it up, and give you some good ideas on how to bring your family into the financial planning.

Budgeting Tools

There are many ways to budget in 2017, and you can find one that suits your personality. Finding the best one for you means you’ll be more likely to stick to it. Here are some choices of family budgeting tools:

Software Budgeting. Software has been around for years and can be a very comprehensive way to budget. Two of the best budgeting softwares are You Need a Budget and MoneySpire. They contain perks such as bill pay and customer invoicing if you run a home-based business.

The only drawback to software budgeting is that it costs money, so you might want to choose another method if you have limited funds.

Excel. Do you love creating and analyzing through spreadsheets? Then, this is the tool for you. There are hundreds of ways to create a personalized Excel spreadsheet, but here’s a good one to begin with: Excel Family Budgeting Planner.

Mobile App. There are many budgeting apps to choose from, and they could be effective for you if you want an easy way to write down planned and occurring expenses wherever you are. It’s a great way to not only budget but to track what you spend. Some useful mobile apps include Mint, Mvelopes, and Wallaby.

Pen and Paper. Sometimes you just need a low-tech, simple way to plan your finances. Writing down expenses on a blank page or on a PDF like the Quick-Start Budget PDF, might be the easiest solution you find, especially if you’re starting out for the first time.

How to Set Up a Family Budget

Your budget should consist of three main components:

Goals. Looking at goals helps you determine what you’d like to do with money. It helps to look at these first, and then see how to achieve them after you calculate the rest of your budget. This way you can focus on what matters most before diving into the raw numbers.

Financial goals could be a family vacation or putting money away for a child’s education. It could be as short term as buying a new refrigerator in three months, or as long-term as planning for a retirement in 20 years. It’s whatever you want to do with your money and a roadmap to get there. You won’t have all the details figured out quite yet, but it’s a good start.

Income. This part is simple if you work a 9 to 5, but can be more complicated if you’re self-employed and don’t have a regular check. Either way, examine your bank statements to see what comes into the account each month, then write all income down on a notepad.

Expenses. For this section, write down all expenses you can think of. You’ll probably want to go through credit card and bank statements to make sure you haven’t missed anything.

After you write down expenses, go through your list and place a checkmark next to the items that are must-have. For most people, these items are housing, utilities, and transportation.

Food is a necessity too, but the dollar amount can change if you budget your meals well and don’t eat out. Be willing to shift your food dollar amount and eat inexpensively if your goals and financial planning call for it.

After you figure out the necessary expenses, focus on everything else. You know if you need to cut if your expenses are greater than your income.

Be sure to set aside some money for fun. It’s okay if it’s a frugal or practically free activity, but make a category for this, and call it “entertainment”.

Bringing in the Family

Now that you have the budget figured out, you can discuss what you want to do for fun as a family. Kids don’t need to know every number on your budget. They only need to know what will involve them, and for most families, it’s entertainment and vacations.

This is the best time to let everyone know how much money you’re setting aside for entertainment and to ask for suggestions. Involving kids in the fun part of budgeting helps to expose them early on to financial planning in an exciting way. Be honest, realistic, and creative as you consider things you’d like to experience as a family.


Setting up a family budget may be a hard at first, but it is rewarding because you get to decide what to do with your money. Involving the kids in the final plan is an excellent way to include them in the decision-making process and teach them about budgeting.

Now it’s your turn. How do you budget for your family, and what are some ways you involve your family members in the process?

Here’s Why You Shouldn’t Apply for Too Many Credit Cards

Credit cards are a wonderful tool. When used properly you can delay paying for a purchase for over a month, leaving money in your bank account earning interest. However when cards are used incorrectly they can lead to overspending, damage your credit rating and lead to a massive interest bills that cancels out any gains you may have made by delaying a payment, or through rewards programs.

Credit cards and credit ratings

Each time you apply for a credit card the banks will check your credit rating. Your credit rating helps the banks determine how much of a risk you are, and how likely you are to get in over your head and be unable to make payments on your card. While this sounds like an innocent check on your records, it also leaves a mark. Some lenders may do a ‘soft pull’ to check your credit score but these are few and far between. Most do a ‘hard pull’ which means not only do they check your credit score, but your credit report is updated with a note saying that you have applied for finance and their response. A hard pull against your credit that is approved will have a minor negative effect, but if you are denied credit, either through a credit card or a loan, it puts a big black mark against your name.

Before applying for a card consider running a check yourself to look at the health of your credit report. There are multiple companies online that will offer a free once off check.

How banks view open credit cards

If you are applying for a credit card, mortgage or personal loan banks will assess your existing debts and any open credit cards. When considering your borrowing capacity banks will calculate those credit cards as if you have spent the full limit, even if you only ever use a small amount and pay it in full each month.

While it might seem like a good idea to open multiple credit cards to receive sign up bonuses, keep in mind how this may affect your borrowing capacity. If you have plans to take out a business or personal loan in the next few months, now is not the time to be applying for a new credit card.

What to do with all this available credit

The final big risk with too many cards is temptation. My bank account currently tells me I have over $10,000 available, but the vast majority of this is available spending on my credit card, and isn’t truly my money. Having those funds available can be extremely tempting. If you let your spending get even a little out of control you could find yourself paying hundreds in interest costs. With multiple cards the problem is expanded because not only do you have a large amount of ‘money’ available, but you have to track your spend across multiple locations and keep track of varying repayment dates.

The Debt Avalanche Method Explained

If you’ve heard of the debt avalanche method, you might be confused as to how it differs from the debt snowball method. Maybe you’re facing a mountain of debt, and you’re looking at how to pay it off with the least amount of struggle.

Debt interferes with daily life and costs us freedom financially. You know you need to pay off your debt, and you’ve been trying to avoid bankruptcy and credit counseling programs.

The problem is, most of the common information you’ve heard about paying off debt seems to ignore one thing: the interest rate.

While the snowball method instructs you to list your biggest debt first and disregard interest, the avalanche method takes a more mathematical approach.

Here’s what both debt management plans have in common: They require that you:

  1. Stop Borrowing Money. You can’t pay off debt if you’re still taking out loans and buying things with credit. You’ll need to cut your budget down to a cash-only plan by reducing expenses.
  2. Have Laser-Focus on Debt. Cancel everything that gets in the way of paying off your debt. This means you don’t invest in stocks, you don’t take an expensive vacation, and you don’t decide to remodel the house. All spare cash goes into your debt program.

Ultimately, the best method is the one you’re more likely to stick with, but you’ll need the details to make an educated decision. By the end of this article, you’ll have a good explanation of the debt avalanche method and whether it’s right for you.

How the Debt Avalanche Method Works

The idea of the debt avalanche method is simple. You place the highest-interest debt at the top of a list and pay them off first. Meanwhile, you make minimum payments to all other creditors at the same time. This way, you minimize the rate of interest accrual by deprioritizing the lower interest debt.

When you pay off your first debt, you give yourself a pat on the back and move your focus to the second debt on the list. You then use the amount that you were paying on the first debt and add it to the second.

If you keep following this method, you’ll have eventually tackled the entire list while paying minimal interest to your creditors.

The main benefit of this method is that you are saving money because you’re paying less interest. The avalanche method will be the perfect plan for you if you can’t stand high-interest rates and giving too much money to your creditors.

You’re likely to have success with the avalanche method if you are:

  • You’re not swayed by short-term gratification or emotional purchases. You’re in it for the long-haul, and you know that if you stay on track, you’ll come out ahead.
  • Detail-Oriented. You make good decisions when you have the facts and numbers at hand. Keeping track of personal finances is a numbers game that you can win if you do your calculations correctly.
  • Tactical and Deliberate. You can’t stand throwing more money at your creditors than they deserve. With a smart plan and solid follow-through, you can save money and pay off debt quicker.

Let’s take an example list of four debts. We’ll say that you are willing to throw in an extra $999 more than the minimum payments each month to pay off debt. Here are the four debts using the debt snowball method:

Debt Snowball Method

The Debt:

Debt A: $4,569 for a car loan with a 6% interest rate and $435 monthly minimum payments.

Debt B: $11,859 in personal loan debt with a 7.6% interest rate and $315 monthly minimum payments.

Debt C. $12,119 in credit card debt with a 16% interest rate and $300 monthly minimum payments.

Debt D. $163,845 in school loans with a 4.750% interest rate and $770 monthly minimum payments.

The Results:

Debt Total (Principal): $192,392

Monthly Payments Total (Minimum Payment of $1820 plus an extra $999): $2819

Payoff Date: February 2024

Interest Paid: $34,429.49

The total amount of interest paid was $34,429.49 with the snowball method. Not pretty. Let’s check the avalanche plan.

Notice that Debts A, B, and C are switched according to highest interest first in the list below:

Debt Avalanche Method

The Debt:

Debt C. $12,119 in credit card debt with a 16% interest rate and $300 monthly minimum payments.

Debt B: $11, 859 in personal loan debt with a 7.6% interest rate and $315 monthly minimum payments.

Debt A: $4,569 for a car loan with a 6% interest rate and $435 monthly minimum payments.

Debt D. $163, 845 in school loans with a 4.750% interest rate and $770 monthly minimum payments.

The Results:

Debt Total (Principal): $192,392

Monthly Payments Total (Minimum Payment of $1820 plus an extra $999): $2819

Payoff Date: February 2024

Interest Paid: $33,660.79

See the difference? The total time to pay off the debt stayed the same when comparing the two methods, but the interest paid changed.

The interest on the avalanche method is not pretty either, but paying off the debt in the debt avalanche order would have saved you a total of $768.70 in interest payments.

The results can be more extreme if you have several high-interest rate loans. Sometimes the debt avalanche method can shave off a few months from repayment time too.

Using an Excel spreadsheet will allow you to add a new sheet for each month so you can go back to check progress quickly and see how far you’ve come.


Using the debt avalanche method can save you money and time in paying your creditors. It might take you longer to pay off the first debts on the list than if you’d used the snowball method, so there is no quick emotional gratification. But knowing that you’re minimizing interest payments to your creditors may be just as rewarding.

Ultimately, the goal is to pay your way to financial freedom by choosing the best debt plan that works for you.

How Does APR Work?

If you have ever taken out a loan for a mortgage, automobile, education, or some personal reason, then you should know what an annual percentage rate (APR) is. At any rate, most people understand that it is some sort of charge on top of the loan. Despite that general concept, a ton of people don’t really understand how it works, and less than enough people seriously take APR into consideration before signing up for a loan. With that said, I am going to cover one of the most basic considerations that need to be made when you are shopping for different APRs on any sort of loan you may or may not take out. I’ll cover some basics by jumping right into it!

What is APR?

As mentioned earlier, APR stands for annual percentage rate. If it sounds completely foreign to you, then just think of it as an interest rate for now even though it is technically different. APR is how the banks and lenders make money! They offer a loan to a consumer and they tack on this APR. Each month, that APR defines how much you will owe in interest on top of the principal balance. For those who do not know, a low APR is preferable to a high APR. Higher APRs mean you’ll end up paying more in interest over the life of your loan.

How Does It Work?

Well, here is a quick run around on how APR works. The annual part means it is calculated over the year despite being applied every month. This is where many people (at least some of the people I’ve talked to) get confused. If you have a 12 percent APR, you will be charged 1 percent interest each month; at the end of the year, that amounts to your 12 percent APR. You will NOT be charged 12 percent each month! It isn’t technically an interest rate because it is taken as a percentage over the year; it’s APR! Despite that distinction, these two terms are used interchangeably all the time. Just know that APR is divided up by twelve months out of the year, and each month you are charged that much in interest each month on your remaining principal balance on the loan.

Typical APRs to Expect

So APRs are defined by whoever is issuing the loan, credit card, or anything else involving interest. These companies rely on an underwriting system that is heavily dependent on credit score, or in other terms, they take into account your credit history when deciding how much money they want to try and charge you each month.

If you are considered a high-risk consumer, that means you do not have a good credit history (just a reminder, having a bad credit history means you’ve struggled to pay your debts on time in the past among other things of course). If you are a high-risk type of person who misses payments from time to time, then you are going to receive a higher APR. Think of it this way. You have a high APR, and you’re terrible at paying your bills on time. The lender is going to make a fortune off of you eventually. Despite that cynical thought, the high APR may actually be meant to discourage you from borrowing a loan in the first place! These last couple of ideas are just some of my ideas, but it remains true that those with unworthy credit generally receive higher APRs.

What is the Difference between a Variable and Fixed APR?

So let’s say you are in the market for a new loan. You need to figure out what annual percentage rate (APR) you want before signing the dotted line. By figuring out what APR you want, I mean you need to decide whether you want a variable rate or a fixed rate on your loan. They definitely aren’t the same thing! Despite being big and bad financial terms, it is easy to understand what they are and how they differ from each other.

APR Basics

So let’s cover a few basics about APR before moving forward. An APR is calculated over the entire year, but it is applied monthly. This means that if you had a 24 percent APR, then you are charged 2 percent each month. The APR defines how much interest you are going to owe from the last month, and that interest amount is tacked on to your principal balance. Well, there is a small lesson in interest payments right there. It wasn’t all inclusive, but it works for this article.

What is a Variable APR?

So here is a quick spoiler: variable APRs change or vary with time. How do they change exactly? Well, they are dependent of the fluctuation of the market. So look at it this way with my quick, cheap example. One year you get a loan with a variable APR of 2 percent because interest rates are low in the market overall. After five years with the loan, you notice that your APR has now doubled to 4 percent. This is because you picked the variable rate, and it is subject to change depending on the market. That scenario sounds awful, but it’s a two-way street, meaning your interest rate could decrease over the same time period. Think of it as a gamble of sorts.

I keep mentioning the market, but I haven’t explained it yet. There is this rate that all of the big banks and groups lend to each other in the stock market. It may differ in name from market to market, but generally, there is a base rate that the big dogs base their rates on. In the United States, the Federal Reserve sets this base rate. All of the lenders tack on basis points (another term for percentage basically) to this rate. There you have it.

What is a Fixed APR?

A fixed APR is a much simpler horse to handle. Like a variable rate, a fixed rate is determined by the market at the start of the loan, but instead of changing over time, it remains fixed at that rate upon disbursal of the loan. It offers more certainty than a variable rate loan because there is no risk of your rate increasing later on, but there is less potential to save on interest down the road.

What’s the Difference?

One of them changes and one of them doesn’t! A fixed rate offers more certainty by keeping the rate stable, but it leaves out the potential for a reduced rate later. A variable rate offers the potential for a lower rate later on, but it’s also much riskier than a fixed rate.

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