"Good" Interest vs "Bad" Interest
Interest is one of those things banks try to convince us is confusing so we don’t question how much they’re charging us. There. I SAID IT.
And I AM NOT SORRY!
I feel a little bit salty over this topic!
But, let me backup and start at the beginning...which is a very good place to start! (cue Julie Andrews!)
What is Interest?
Okay, simply put, interest is the “rent” you pay for using someone else’s money to buy something.
In this case, “other people” are the banks, mortgage companies, credit card companies, etc that you might borrow money from. (Yes, buying something with your credit card is taking out a loan.)
How much rent you’re paying is the interest rate. So, you borrow $100 grand and the bank is going to charge you 6%. That means, you’re going to have to pay the bank the $100 grand you borrowed, PLUS another $6 grand in interest because they let you use their money. This is why if you ever look at a loan statement you’re paying back more than 100% of the money you borrow. The total amount of the loan includes the interest.
Good so far? Coolio.
(Yes, I know there’s a difference between simple and compound interest. We’re keeping things easy-peasy right now. That’s a blog for another day!) 🤷
Now, let’s talk “Good interest” vs “Bad interest”.
What is “Good Interest”
Good interest is the interest the bank or financial institution pays YOU!
For most of us, this is interest we get paid through our savings accounts. Although let’s be honest, the average savings account pays a miserly pittance. Even online banks, which have lower overhead costs and therefore usually pay a smidge more interest...still don’t pay much.
Enter the High-yield Savings Account, or HYSA for short.
The High-Yield Savings Account - The BEST Place for You to Earn Interest!
And that means you’re ready to open an HYSA!
A High-yield Savings Account will pay you more Good Interest than a regular savings account. Like a LOT MORE!
Right now, a regular savings account will pay you anywhere from .06% to as little as .01% each month on the money you have in that account. That means the bank is going to pay you .0006 to .0001 times the amount of money you have in that account.
This is why when you look at your bank statement, you made a whopping PENNY in interest!
Enter the high-yield savings account! Right now, high-yield savings accounts are paying anywhere between .40% and .50%.
🤑 🤑 🤑 That’s SIXTY-SIX TIMES AS MUCH! 🤑 🤑 🤑
This is why I Highly Recommend putting your Emergency Fund in a HYSA. The interest is sooooo much better. I also have my Vacation/holiday savings account and my Because It Pleases Me savings account in an HYSA, but you don’t need to if that’s too much to think about right now.
But WHICH High-yield Savings Account?
My favorite high-yield savings account is Marcus by Goldman Sachs, but Chime is also really good. They both have excellent rates, so don’t get too precious about it, just pick one. Remember, we want to make $300 or $3,000 decisions, not $15 decisions.
Either one will do. If you find that for some reason neither one works for you, then a simple google search of “best high-yield interest rates now” is all you need to do. 💪 💪 💪 💪
Now, let’s talk about “bad” interest.
What is “Bad” Interest
So, interest isn’t inherently “good” or inherently “bad”. Remember, interest is just the “rent” paid on money loaned to someone.
What I mean by “bad” interest, is the interest charged by banks or lending institutions. Specifically, I mean the high-interest rates that some credit card companies charge, especially for store cards (usurious), the phenomenally high-interest rates used car lots charge (minions of hell), and the outrageously high-interest rates payday loan companies charge (the crack cocaine of the finance industry)!
Of course, you should pay someone for the use of their money! If they loan it to you, they can’t use it to buy something, so you should pay them for the use of it. That’s not what I’m saying.
What I’m saying is the “bad” interest rates that are out there are quite often ridiculous and cause you to pay a LOT more "rent" than you should have to!
That’s why whenever you’re going to take out a loan, you have to “shop” it. Just like you would the best Black Friday Sale or the Nordstrom Anniversary Sale! There are deals out there to be had, you just have to find them.
Some rules of thumb:
- Home Mortgages - call at least five different places and be sure to ask not only what the interest rate will be, but also their loan fees. They can “hide” quite a lot in those “fees”.
- Car Loans - please, please, please do NOT get a loan on site at the car lot. They are always higher. When you need to buy a car, and you know you’re going to need a loan, shop for the loan before you shop for the car! That way you’ll know the total amount, time of loan (how many years), interest, and fees.
- Credit Cards - take a look at your credit card statement and see what the interest rate is on each one of your cards. If your credit score is more than 700 and any of your cards are higher than 9.99%, call and see if you can get them to lower the rate. If they won’t, it’s time to shop for a better card.
Whenever I talk about “bad” interest, I always try to remember that banks, lending institutions, and credit card companies are all made up of people. People who need to pay their bills, feed their kids, and keep a roof over their heads. I get that.
But, I also know that there are plenty of deals out there that will let everyone eat equally well!
One more thing about banks and loans and interest rates:
Don’t stop at the first bank! DON’T talk to just ONE loan officer. Call several. AND, let them know you’re talking to several. Give them a reason to compete.
But, beware! ☠️
They will try to turn the tables on you by telling you the rate is only good for a super short time period. Don’t get suckered. If you call later and they say they can’t give you that rate now...call someone else. Bank’s stay in business by loaning you money...they want you to rent their money!
Want to know more about saving and credit cards? I’ve written about them LOTS!! Maybe one of these will be helpful, too 😊 😊 😊
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