What Now?


By: Gary Foreman

Dear Dollar Stretcher,

Since the Fed lowered the interest rate what do I have to do to benefit? Do I need to contact each credit card company and just ask for a lower rate? I also lease a truck from Toyota. Would the same question apply? If you  could answer this I would be grateful. Vince

With interest rates at their lowest level in two generations Vince is  hoping to benefit. And he's right. Lower rates do make life easier for  borrowers. So what does Vince need to do to take advantage of the situation? Let's look at his questions one at a time. First, his credit cards.  Vince's cards will be one of two types - either fixed or variable rate. A fixed rate card offers rates that won't change as other interest  rates increase or decrease. The rate is set by the card issuer and agreed  to by the borrower.

The other type of card is a variable rate credit card. The rate  charged for outstanding balances will be tied to the prime rate. Vince  should see any rate drops almost immediately.

How can Vince find out which type he has? He can check his original  credit card agreement, his statement or call the card issuer. Most cards  are variable, but the only way to know for sure is to check.

Vince should transfer any open balances to variable rate cards. He'll  also want to watch his statement to make sure that the rate has been  lowered. That should happen automatically. But, if he doesn't see a lower  rate in the next billing cycle or two, it wouldn't be a bad idea to call  the card issuer to find out why the rate hasn't changed.

No matter what's happening with the rates, Vince can always try to  get a lower rate by phoning the card issuer. It doesn't take much in the  way of time or effort. Most issuers will not make changes. But a few will.  He doesn't want to try monthly, but once a year wouldn't hurt. Vince is  more likely to have success if he's been good about making his payments on  time or if his credit file has improved.

There's another way that Vince can reduce the amount of interest that  he pays each month. That's by reducing his credit card balance. He can do  that whether the card issuer lowers his rate or not. Remember, he'll only  pay interest on the amount of money that he's borrowed.

Vince's truck lease is a different matter. Auto leases are almost  always based on a fixed rate. That means that the rate is fixed from the  day that Vince drove it off the lot until the day that he makes the final  payment.

He doesn't mention it, but Vince will find the biggest savings are on  home mortgages. A one percent change in a $100,000 mortgage would save $68  per month. That can add up pretty quickly. Especially if Vince were to  refinance at the lower rate and keep making the same monthly payments as  before. He'd knock 10 years off of his mortgage.

Like most consumers, the new lower interest rates presents Vince with  two choices. The lower monthly payments would allow him to spend a little  extra each month. But Vince needs to be very careful not to increase the  total amount he owes. If he does he'll be in for a nasty surprise when  rates rise sometime in the future.

The other option would be for Vince to continue making the same  payments that he is now. The extra amount over his minimum will be applied  to reduce the amount owed. If he's comfortable with his present payments  it's a great opportunity to repay debts without tightening his budget. Lower rates do make it easier for borrowers. But they also present a  danger. A payment that's tied to a variable rate account may be comfortable  today. But when rates rise the payment will rise, too. So be careful not to  make commitments that will be difficult to honor later.

Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com/save.htm You'll find  hundreds of free articles to save you time and money. Visit Today!

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