The Power of Interest Rate Swaps

Interest rate swaps are financial instruments that can lower debt or increase cash-flow. They do this by exchanging debt or cash-flow from interest and can also be used to help reduce risk. Interest rate swaps are usually performed by financial institutions and can alter cash-flow if interest rates or currency exchange rates change. 

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A Look At How Interest on Credit Cards is Calculated

Credit cards differ in the way they calculate interest, but the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) does pose some universal restrictions  on credit card interest calculations within the jurisdiction of the United States. One of the more clear benefits of the credit card law is a postponement of changes to interest rates on new and existing accounts. Some factors that may influence how your credit card interest is calculated are described hereafter.

Image source: Petr Kratochvil

Interest on credit cards is determined using periodic calculation of interest on existing account balances. If interest were not calculated periodically, one would essentially have more time to pay off one's credit card debt without interest being calculated on the balance. The method of interest calculation used by credit card companies is disclosed in the information within the credit card agreement. However, a credit card may promote a low interest rate in its advertising, but that interest rate may not necessarily be fully representative of the credit card agreement which itself may include additional interest rate calculations and variables not made evident in the credit card's advertising.

Looking at how interest rate on credit cards is calculated in more detail can be more useful than simply knowing what the Annual Percentage Rate (APR) is because the APR does not include important aspects of interest calculation such as the inclusion of fees and method of calculating balance as part of the interest rate function i.e. interest on a credit card is typically more dynamic than the application of an APR to a monthly balance because of variability in balance due, credit card terms, and interest rates.

• Fees included in interest rate calculation

Finance charges are often dollar values or percentage rates. In the case of percentage rates, finance charges are added to the total amount of credit card interest charged. For example, if Mr. X incurred a finance charge for paying late or using a fee only credit card service, that charge may either be an added fee such as $5.00 or an added interest rate such as .01%. The more finance charges apply and are allowable under the credit card terms, the greater the potential interest charged.

The difference between a dollar or interest rate charge can be of significance in regard to finance charges. For example, if Mr. X has an unpaid credit card balance of $450.00, $15 of which is unpaid fee carried over from the previous month, interest will be calculated with that fee included.

• Interest on outstanding balances

It is usually clear that interest is charged on a credit card's outstanding balances outside of that credit card's grace period. However, how this balance is determined is also variable. In other words, how the balance is calculated, and there are more than one ways of doing this, can affect how much interest is charged.

For example, Mr. X's credit card agreement uses the average daily balance method to determine what the balance is, and what time period within the billing cycle the balance is taken from. Another method deducts payments made and charges interest on the average daily balance thereafter. Consequently if payment is not included in the balance calculation, until the next billing cycle, more interest will be charged.

• Frequency of calculation

A credit card company may calculate interest daily, weekly or monthly depending on the terms of agreement; these rates are called periodic rates. Periodic rates are determined by dividing the APR by the amount of periods for which interest is charged. For example, if a daily periodic rate is used, the APR is divided by 365 and then the resulting number is the rate charged to any unpaid balance past the billing cycle. If calculated daily, the total interest accumulated by the end of the payment period will be higher than monthly periodic interest calculations.

• Base and added interest

Credit card interest rates themselves may be divided in to two numbers, so it can be important to read the fine print on a credit card agreement because it may tell you if the quoted APR is all inclusive or if it excludes the base rate. A base rate may be a national bank rate such as the prime rate which is an interest rate determined by the Federal Reserve Bank and fluctuates with increases and decreases with the Federal Funds Rate.

• Variable Vs Fixed rate interest

If a credit card has a variable rate, the interest calculated on the balance may differ between billing cycles. A variable rate may be used to changes in the banks cost management, base interest rates, market conditions and bank policy. Fixed rate credit cards do not experience fluctuations in interest rates so long as the contract between the bank and card holder allow such.

Source: http://www.ftc.gov (U.S. Federal Trade Commission)

Where to look to get the best mortgage rates

Looking for the best mortgage interest rate need not be complicated or difficult. To make it less difficult, first identify the type of loan you are looking and qualify for, then find out what companies or organizations service these types of loans. For example, if you are seeking affordable housing solutions and have a low to medium income, you may even qualify for a zero percent forgivable mortgage through programs such as Community Frameworks. Similar programs exist nationwide, but are subject to resource and application limitations.

For mortgage borrowers who only qualify for non-subsidized mortgages, good rates can still be found. The most recent edition of a national newspaper's business section should have basic average mortgage rates such as 30 year, 15 year and Adjustable Mortgage Rates. Sites like mortgageloan.com can help you look for and compare the best  average mortgage rates by region, loan type, loan amount and credit.  However, this does not mean you can't get a lower rate than the national average. This is because other factors can influence what your actual mortgage rate will be.

• Regional differences

Different regions of the country may be experiencing different economic conditions which can also influence mortgage rates. For example, Nevada, California and Florida all experienced large home price depreciation and foreclosures in the years following the housing bubble burst in 2007-2008. These conditions may make mortgage rates in these areas lower than in other areas of the country. For example, on October 22, 2010, several of the 30 year fixed rate mortgages on Zillow.com were quoted at rates as much as 50 basis points or half a percent lower than the national average of 4.24 percent.

• Selecting a financial institution

When looking to get the best mortgage rates, another thing to consider is the financial institution or mortgage lender. If you are purchasing a home directly from an owner via a rent to own type situation, the rate may be privately negotiable as the lending formula is probably not the same as a mortgage bank. Mortgage banks and banks that offer mortgage loans may differ due to competition. For this reason where you look for mortgage rates in your area could yield several different rates.

• Type of mortgage loan

The type of mortgage product can also influence what you find in places that offer mortgage loan products. For example, the rate and terms of a 203(K) FHA mortgage rehab loan can differ from an REO mortgage on government owned property. Each loan may be subject to different housing regulations and therefore varying interest rate allowances, benchmarks and restrictions. This is especially the case with government and non-profit mortgage loans.

• Mortgage rate variables

The best mortgage rates are dependent on a few financial variables that are ideally factored into the equation when looking for them. A mortgage loan officer should be able to inform you about some of these factors when applying for a mortgage. A basic rule of thumb is the less risk there is to the bank, the lower the rate will be. Risk is calculated using debt to income ratio, credit score, down payment amount, asset worth etc.

• Lowering mortgage rates

After having looked for the best mortgage rates and found some ballpark estimates you then have a mortgage rate with which to improve upon. For example, if you are looking for a 15 year refinance for under $100,000.00 what can you do to lower the rate from the existing quote you are given by a broker, online rate quote, or mortgage lender?  For example, you may be able to purchase 'points', which is essentially an extra upfront cost that is entered into your good faith estimate and lowers your mortgage rate.

Sources: (Date of record, October 22, 2010)

1. http://bit.ly/a74Pny (Zillow.com)
2. http://bit.ly/agLURp (Community Frameworks)
3. http://bit.ly/c4SZMo (Mortgageloan.com)
4. http://bit.ly/2VAul8 (HUD)
5. http://bit.ly/anU2YX (Fannie Mae)

Credit cards: How to Ask For and Get a Lower Rate on Your High Interest Credit Card

It isn't always necessary to use a credit counseling service to negotiate a lower interest rate with a credit card company. Very often the company will negotiate a lower interest rate with their client, especially if bills are paid on time or if one is experiencing financial difficulty. There are several steps of ascending impact that can help an individual lower the monthly finance charges on credit cards. This article will first outlines steps credit card holders can take then illustrate additional methods for lowering interest rates.

• Call the credit card company

Simply calling the company and asking for a lower interest rate may be all that is needed. Keeping the request reasonable i.e. in accordance with one's credit score, and having good reasons for asking for the reduction can be helpful in terms of obtaining a more favorable response from the credit card company. If the credit card is already charging a dramatically high-rate, the benefit of keeping a client's business may be worth a couple of percentage points or more. If the credit company declines the offer, don't worry, there are other methods that may work as well.

• Send a credit negotiation letter

If asking for a reduction in interest rates doesn't work, one may send a more formal written request via a credit negotiation letter. There are many sample 'credit negotiation letters' available on the web that can be used as models and some consumer service organizations allow consumers to freely download and copy their letters for the purpose of interest and other credit negotiations.

• Request to speak with a credit manager or account supervisor

If neither of the above two methods have proven effective after following up with the credit company and/or after a couple of weeks have passed another step may be taken. This next step involves contacting the company again by phone and asking for a credit manager, customer service manager or account supervisor. In a polite, yet firm voice express how the previous steps have had little reception and that one's request is not unreasonable. The customer service manager may be more willing to listen and have more influence in the interest rate reduction process.

• Express Interest in a different credit card company

If the customer service manager still does not accept to lower the rate, ask him or her why. They may respond with reason such as irregular payments, credit risk, market rates etc. Don't be discouraged by such banking lingo. As a client, one's power derives from one's business with the company. If the credit card wants to keep one's business, they may think twice about lowering interest rates. Informing the manager paying bills would be easier with a lower interest rate and that there are several other companies who would gladly accept a balance transfer at a lower rate in return for one's business.

• Credit counseling services

Sometimes, one's credit rating may just be too low, or the negotiation method employed doesn't work, or the credit card company won't negotiate. It's not over yet, but could get a little more complicated at this point. Credit counseling services are skilled with working with credit card companies and can often obtain a lower interest rate for their clients. In some case a 0% interest rate is workable if one is experiencing financial difficulties and is trying to avoid bankruptcy. These credit counseling services are ideally researched well, offer reasonable rates and guarantees.

It is very possible to acquire a lower interest rate on one's credit card. If for some reason none of the above methods work, trying again after a 4-6 months of on time payments will help nullify the credit managers potential complaint about irregular payments and possibly make him or her more amenable to providing the lower interest rate. Acquiring a lower interest rate on one or many credit cards is possible, and is achieved on a daily basis by clients, credit negotiation companies. Utilizing the above steps may greatly empower a credit card holder in obtaining a lower interest rate.

Sources:

1. http://creditfederal.com/debt-negotiation-letter.html
2. http://www.investopedia.com/articles/pf/08/negotiate-credit-card-apr.asp
3. http://www.askmrcreditcard.com/creditcardblog/negotiating-with-your-credit-card-company/