Money Management

Interest rates are widely considered the most important factor when choosing a credit card. Discover why this is a big mistake and how it can cost you. 

What’s the most important factor you look for when choosing a credit card? If you’re like many Americans, the first thing you’ll check out is the interest rate.

When asked that question, 36% of Americans said interest rates were most important, according to The Ascent’s study on Americans’ credit card preferences. That was far ahead of any other factor. It was followed by rewards (selected by 18% of Americans), annual fees (15%), and 0% APR windows (10%).

This makes sense in theory. Credit card interest can cost you a lot of money. By looking for cards with lower interest rates, you’d pay less on any balances you carry from month to month. But this actually isn’t the best way to choose a card, and it could end up costing you.

Why you shouldn’t choose a credit card based on its interest rate

Some people have the misconception that a credit card is a good way to borrow money. However, credit cards have high interest rates; the average is currently above 20%. Even cards from credit unions, which are known for offering lower interest rates, are charging annual rates of 12% to 15% or more.

When looking for a new credit card, you shouldn’t plan on carrying a balance from month to month. It just doesn’t make sense financially because of how much credit card interest costs. The optimal way to use a credit card is to always pay off the full balance by the due date.

If you need to borrow money, then most credit cards aren’t the right financial product. The only exception is 0% APR credit cards. These have a 0% intro APR on purchases, and intro periods can last 12 months or longer. If you can pay off your balance within the intro period, these are a great way to borrow money for big purchases. Personal loans are another option, as these normally have much lower interest rates than credit cards do.

If you’re planning to pay your credit card in full every month, then the interest rate doesn’t matter. It may go against what you’ve heard in the past, but if you always pay in full, you won’t be charged interest. You’re much better off focusing on other factors, such as rewards, that will help you find the best credit cards for you.

How to choose the right credit card

Knowing how to choose a credit card is important so you can find the one that will save you the most money.

First, ask yourself if you’re going to need to carry a balance. If so, stick to 0% intro APR credit cards. For example, if you have large expenses that you’ll need to pay off over time, a 0% APR card could help with that. Or, if you have credit card debt you want to refinance, look into balance transfer credit cards.

If neither of those situations apply to you, then you can ignore interest rates entirely. In this case, the best option is typically rewards credit cards. These earn rewards on your spending in the form of cash back, points, or miles. Here are a couple of lists to check out with top options, depending on whether you want to earn cash back or travel rewards:

Best cash back credit cardsBest travel rewards credit cards

For an example of how much you can save this way, let’s say you get a cash back card that earns an unlimited 2% on purchases. You spend $25,000 per year with your credit card. That’s $500 per year in cash back, all because of the card you used for your regular spending.

The key to making this work is to never carry a balance on your credit card. If you do that, then a card’s benefits are what’s important, not its interest rate.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Lyle Daly has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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The flexibility you get with a personal loan could come back to bite you. Read on to see why. 

You have different choices when it comes to borrowing money. You could rack up a balance on a credit card you already have, but that might mean spending a lot of money on interest.

Or, you can look at taking out a personal loan. These loans let you borrow for any purpose, and if you have great credit, your chances of getting approved for one are pretty high.

As of the end of 2022, U.S. personal loan balances reached $222 billion, according to TransUnion. So clearly, they’re a pretty popular borrowing choice. And the reason for that most likely boils down to the fact that they’re extremely flexible. But while that flexibility is a good thing to some degree, it can also be somewhat of a curse.

The problem with too much leeway

When you take out a mortgage, you must use your loan proceeds to finance the purchase of a home. Similarly, if you sign an auto loan, you’re doing so to buy a car.

Personal loans work differently. When you take out a personal loan, that money is yours to use for whatever purpose you deem necessary. You could take out a personal loan to renovate your home, fix your car, or upgrade your electronics so you’re more efficient at your freelance job. But you could also take out a personal loan to go on vacation, spend money on clothing, and follow your favorite band on tour for the summer.

And there lies the problem with personal loans. Because they’re so flexible, you may be tempted to borrow money for something you should really be saving up to purchase instead.

It’s one thing to take out a personal loan to replace aging appliances in your home that are not only not so functional, but are costing you money in the form of higher electricity bills. It’s another thing to take out a personal loan so you can buy the latest gaming system and upgrade to a better TV when you have a perfectly good one in your living room.

Remember, when you take out a personal loan, you’re signing up to pay interest on the sum you borrow. And these days, interest rates are up across the board on the heels of the Federal Reserve’s string of rate hikes. So all told, a $1,400 TV might end up costing you $1,700 when you factor in the interest you’re paying on it.

Also, there are consequences to falling behind on personal loan payments, just as there are consequences to failing to repay a mortgage or auto loan. Failing to repay a loan could damage your credit score, making it pretty much impossible to borrow money should you need to do so in an emergency. And that’s why the flexibility to use a personal loan for any reason isn’t always such a great thing.

Borrow for the right reason

If you’re going to take out a personal loan, do so to make an investment or improvement in your home or vehicle. You might even take out a personal loan if you’re using the money to kick off a business venture.

But don’t take out a personal loan and spend the money on frivolous things like gadgets or tickets to live events. These things might be important to you, but if so, you should make a point to save up for them ahead of time.

Taking on any amount of debt means having to factor ongoing payments into your budget. So if you’re going to go this route, it should be for a purpose that’s truly essential.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Replacing a used car is not an inexpensive prospect these days. Read on to see why you might end up out of luck if your car is totaled. 

It’s important to have an auto insurance policy in place, whether you have a new car or a used one. And if your vehicle falls into the latter category, you may be spending less on auto insurance than someone with a new vehicle.

Now, the good news is that used cars have become more affordable than they were last year. In April, used car prices were down 6.6% on an annual basis, according to that month’s Consumer Price Index.

But that doesn’t mean buying a used car today is an inexpensive prospect. And so even if you have good insurance for your used car, you may be in for an unpleasant surprise if your car winds up getting totaled.

When you don’t get compensated enough

When your vehicle sustains damage in an accident, your auto insurance company will often opt to pay for the cost of repairs. But if the cost of fixing your car exceeds its value, then your insurer might instead decide to write off your car as totaled. What it will then do is write you a check for the market value of your car. And you can then take that money and use it to buy a new vehicle.

The problem, though, is that the payout you receive from your auto insurance company may not be nearly enough to cover the cost of a replacement car. Let’s say your used car gets totaled and your insurance company ends up writing you a check for $8,000. The average used vehicle listing price as of the end of March was $26,202, according to Cox Automotive.

Now clearly, since that’s just an average, it’s conceivable that you might end up finding a used car for a lot less money. The point, however, is that the payout you get from your auto insurance company may not be enough to purchase a replacement car. So it’s important to be aware of that, and not take too much comfort in the fact that you have insurance.

Make sure to have savings

A totaled car could leave you in the lurch if you’re forced to go out and buy a replacement vehicle today. Not only are car prices still expensive, but auto loans have gotten costly, too.

That’s why it’s a good idea to sock away some extra cash in your savings account. If your car gets totaled, you might be able to dip into your savings and use your cash, coupled with the payout from your insurer, to buy yourself a replacement car and avoid having to borrow for one.

In fact, let’s say you get a check for $8,000 and find a suitable replacement car for $13,000. If you have $5,000 in savings, you won’t have to finance that vehicle and get stuck with the higher interest rate you’d likely be looking at today.

All told, having auto insurance won’t always guarantee that you’ll be made whole in the event of a car accident. If your car is totaled, you may have to shell out money to replace it — so pad your savings accordingly.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Ramit Sethi espouses a positive approach to spending. Erin Lowry specializes in millennial finances. Here’s how financial advice can be fun and informative. 

No matter your financial question, you’ll likely find a guru with an opinion. Unfortunately, getting financial advice online verges on asking everybody in your local 7-Eleven what you should do with your money. Experts with years of experience rub shoulders with snake oil sellers and everybody in between.

All the same, if you’re not sure about how to manage your money, there’s a wealth of information out there as well as savvy pundits with useful advice. Whether you start with physical books, money podcasts, blogs, or a course at your local library, the more you understand, the stronger the financial foundations you’ll be able to build. The trick is to find knowledgeable gurus who speak your language.

Here are four with some powerful messages that can change the way you think about money.

1. Suze Orman

Best-selling author and host of the Women & Money podcast, Suze Orman isn’t afraid to tell her fans they need to make sacrifices so they can live within their means. If you’re carrying credit card debt and/or don’t have any savings, Orman’s tough love approach means making drastic spending cuts or taking on extra work to improve your financial situation.

One of the great things about Orman is that she understands the connection between emotions and money, and the way that our fears and insecurities can cause us to spend on things we don’t need. That said, Orman is from the don’t-waste-money-on-store-coffee school of personal finance. She’s militant about prioritizing needs rather than wants, especially if you’re living paycheck to paycheck.

My biggest takeaway: Emergency funds matter

An emergency fund is like a big fluffy emotional comforter that you can turn to when things get tough. Whether it’s a job loss, a medical issue, or another of life’s curveballs, if you have money put aside, you’ll be better placed to deal with it.

Orman advises her fans to aim to have a years’ worth of living expenses in their emergency fund. She’s even co-founded a company called SecureSave, which partners with employers to help their staff build emergency savings. If 12 months’ worth of money sounds like an impossible goal, start smaller. Think about what you can realistically save each month and put that into an accessible savings account. After a few months, you might be able to contribute more. Even if you can’t increase the amount, those regular savings will add up over time.

2. Ramit Sethi

Unlike Orman, Sethi doesn’t think you’ll get rich by giving up your daily latte. Frugality is all very well, but Sethi says there’s only so much you can cut but there’s no limit on how much you can earn. For example, he gives plenty of advice on maximizing your income, whether that’s by getting a raise, starting a business, or investing.

Rather than getting bogged down in the details, Sethi’s approach is to put your energy into the big decisions that will make a significant difference to your financial situation. As he puts it, “Ask $30,000 questions, not $3 ones.” Part of looking at the bigger picture means understanding how to invest.

He advocates investing in a low cost index fund and starting as early as possible. He’s a big fan of making automatic transfers to your brokerage account so you don’t have to spend time thinking about it. If you’re new to investing, check out our list of top online brokers for beginners.

My biggest takeaway: Say yes to spending on things that matter to you

The host of Netflix’s How to Get Rich series champions ways to build a rich life. That means identifying the things you love and finding ways to spend more on those things. So, if you love travel, you might cut costs in other parts of your life so you can travel more.

When you see money as something that enables you to live the life you want, managing it becomes less of a chore. Your savings and investments are a tool to help you spend more time on the things you enjoy.

3. Warren Buffett

Buffett isn’t a guru in the sense of publishing blogs or recording podcasts, but that doesn’t mean he’s not a financial guru. He’s one of the most successful investors around, and there are plenty of lessons we can learn from the Oracle of Omaha.

Buffett is a poster boy for frugality — he may be a billionaire but he currently drives a 2014 Cadillac, according to New Trader U. He isn’t afraid to swim against the tide, and doesn’t make investment decisions based on what the media or other investors are doing. You won’t catch Buffett acting out of FOMO.

My biggest takeaway: Only invest in what you understand

If you’re new to investing, it’s tempting to buy all kinds of stocks and assets because you’ve read about them online or an expert says it’s going to generate excellent returns. (I’m talking to you, Bitcoin.) Instead, Buffett advocates buying only a few assets that you understand deeply. Before he buys a company’s stock, he’ll read every annual report he can get his hands on and research the strategy and business in detail. And when he buys, it’s because he plans to hold onto it long term.

4. Erin Lowry

Broke Millennial grew from a popular blog into a series of books and other resources that aim to help millennials (and other generations) to manage their money. Lowry’s “I’ve been there too” tone goes a long way to making money less scary. She includes that, plus plenty of hashtags and a good dose of humor. Indeed, Broke Millennial has a whole chapter on getting financially naked with your partner, which is both steamy and practical.

Her view on the all-important takeaway latte? It’s OK to treat yourself, but work it into your budget. Lowry used to budget for a couple of lattes a week. She recently started making more coffee at home because she says the pleasure-value ratio was out of whack. Lowry’s not a fan of mindless consumption, but if lattes are your thing, the trick is to figure out how you’ll pay for them.

My biggest takeaway: Get into the habit of saving

When you’re living paycheck to paycheck or putting every extra cent you have toward paying down debt, the idea of saving or investing can seem impossible. Lowry’s view is that if you wait until you’re in a good place financially, you’ll never save a dime.

“Starting the process gradually reduces the pinch and makes it easier to keep saving,” she writes in the Broke Millennial book. If all you can save is $5 a month, she thinks you should do so. Once you’re in the habit of saving, you can start to gradually increase the amount you put aside. Plus, when you start to earn more, that cash is less likely to get eaten up by lifestyle creep.

Bottom line

A 2020 Mind Over Money survey by Capital One and The Decision Lab showed that 77% of us feel anxious about our money. Sadly, that stress makes us less able to manage our finances and more impulsive in our spending. If you can relate to this, perhaps some of these financial gurus can make money less scary. That, in turn, might make it easier to set financial goals and meet them.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Netflix. The Motley Fool has a disclosure policy.

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Being upside down on a car loan means you owe more than the car’s current worth. Read below to find out how to get out of it. 

Car loans can help you afford a vehicle that you need for work or pleasure. However, having the best car loan is important. If not, it can quickly become a burden, especially when your loan balance is higher than the value of your car. This is known as being upside down in your car loan and it can be a stressful situation. You may feel stuck with high monthly payments and a car that is worth less than what you owe. Fortunately, there are ways to get out of an upside down car loan. Here are six ways to get back on the right track.

Create a plan

You’ll need to calculate exactly how much negative equity you have. Determine your car’s current value. You can go to websites such as Kelley Blue Book or Edmund’s to get a good idea. From there, you can subtract any outstanding balance on your loan to determine your negative equity. Contact your lender or log in to your online account to find out how much you owe.

For example, if your car is worth $20,000 but your car loan balance is $24,000, then you are upside down by $4,000. Once you have a clear understanding of the situation, you can create a plan to start chipping away at that debt. Choosing the right solution ultimately comes down to two key factors: keeping your car or your money, and how quickly you need to get your personal finances in order.

1. Pay the difference

If you have the money, the best thing to do is pay the difference. You can sell the car, and then pay the difference between that and the amount you owe. Make sure you don’t deplete your emergency savings account in the process, though.

2. Make extra payments

If you don’t have the money to pay it all off, then making extra payments can help you pay down the loan balance quicker. Consider making bi-weekly payments, rounding up your monthly payment, or paying extra when you can to help make a dent in the loan balance.

You can also increase the payments you make. The bigger your payment, the more quickly you will pay off your loan. With each extra or larger payment, you whittle down the amount you owe and reduce the interest that continues to accrue. However, check your budget and make sure that you can afford to make the extra payments. If not, you may end up in a worse situation.

3. Refinance your car loan

Another way to get out of an upside down car loan is to refinance your loan. By refinancing the loan, you can lower the interest rate and your monthly payments. Additionally, if your credit score has improved, you can get a better interest rate and terms than you did initially.

Refinancing does come with fees and charges that you’ll need to consider. Be sure to shop around for the best refinancing terms and to avoid extending the loan term too much, as this could lead to paying more interest in the long run.

4. Trade in your car

If your car is still in good condition, you can trade it in for one with a lower payment. This way, you can reduce your debt while also getting a car that you can afford. This solution is generally not ideal, however. Trading in your car may not get you out of an upside down car loan entirely.

This is because the amount you owe is added to the cost of your new car, which means you still have to pay the same amount of money. You can try to find a car that is $4,000 less than its value, but with today’s record-setting prices, it may be difficult to find one.

5. Sell your car

One of the easiest ways to get out of an upside down car loan is to sell the car and use the proceeds to pay off the loan. If you owe more than the car is worth, the sale price may not cover the entire loan balance.

In this case, you will need to come up with the difference to pay off the loan in full. While this may seem like a daunting task, it can be worth it in the long run to avoid being stuck in a high-interest car loan.

6. Keep the car and wait

If none of the above options work for you, you can always keep the car and wait. You can continue to make your payments and pay the car off. This option is not the most desirable but can be the most beneficial in the long run, especially if it is a car that you wanted to keep.

Being upside down on a car loan can be a stressful situation, but it’s essential to know that there are effective ways to get out of it. The average person buys a car every 10 years. Upside down car loans usually occur because either the down payment was too small, the interest rate too high, or you overpaid for the car. Do your research before you purchase a car so you don’t get caught in this situation again. In the meantime, these solutions can help you get out of an upside down car loan. Remember, every journey begins with a single step, and taking action today can help you get closer to your financial goals.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Have an emergency fund that’s falling short? Read on to see what options you have. 

A recent SecureSave survey found that 67% of Americans couldn’t cover a $400 emergency expense with money from savings. And that means a lot of people are vulnerable to debt when unplanned bills strike.

A much better bet is to maintain an emergency fund with at least enough money to cover three months of essential expenses. But whether or not you’ve reached that point, you might run into a situation where you’re faced with a large expense and your savings account balance just can’t cover it.

Let’s say your essential bills total $3,000 a month, and so you’ve managed to put together a $9,000 emergency fund. In theory, you’re in pretty good shape. But what if your roof fails and you’re looking at $11,000 to replace it? Suddenly, despite having built a nice emergency fund, you’re in a bind.

In that situation, borrowing money to make up that shortfall may be your best, and frankly your only, bet. But it’s important to borrow strategically to minimize your costs.

A more optimal way to borrow in an emergency

When your emergency fund falls short and you need access to added funds, your first inclination might be to reach for your credit cards and swipe away. After all, that line of credit is already there. You don’t have to go out and apply for a loan — and deal with a possible rejection.

But while falling back on your credit cards to cover an emergency expense might seem like a good idea, the problem with doing so is that credit cards are notorious for charging high interest rates. So if you’re forced to carry a balance for, say, a year or longer until it’s paid off, you might end up spending quite a lot of money.

Plus, too high a credit card balance could damage your credit score, even if you’re paying your minimums on time every month. And that could cause problems if you need to borrow a second time in a pinch.

That’s why a better bet may be to either borrow against your home equity or take out a personal loan. If you own a home you have equity in, you could apply for a home equity loan. You may find that you’re able to snag a reasonable borrowing rate on one of these loans (though keep in mind that borrowing costs are up across the board these days).

If you don’t own a home (in which case you wouldn’t be looking at a roof repair, but rather, another large surprise bill), then a personal loan could be a good borrowing option. These loans let you borrow money for any purpose, and their interest rates tend to be competitive. If your credit score is in great shape, you might manage to eke out savings on your loan’s interest rate.

A tough situation

It can be incredibly frustrating to work hard to build an emergency fund only to have it fall short of what you need to cover a surprise expense. But sometimes, these things happen. If so, and you need to borrow money, think twice before reaching for your credit cards. That might seem like the easiest option, but it’s one you might sorely regret after the fact.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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