The Federal Reserve and how interest rates are set.

You have probably heard about the Federal Reserve once or twice through your favorite news outlets. You may have also known that special members of the Federal Reserve hold meetings frequently to discuss interest rates and whether or not to raise or lower them. More information on monetary policy meetings here.

The Federal Reserve has a very profound effect on interest rates through changing what is known as the "discount rate. This is the rate in which money is disbursed to member banks in the form of loans. Member banks are required to keep reserves and sometimes need to borrow money to meet reserve requirements. These member banks also make loans to other banks, who in turn use that money to lend to corporations and individuals such as students. Major financial publications such as the Wall Street Journal, post the discount rate and other economic data in or around the front pages for investors to see. This data serves as a cluster of indications of the state of the economy and consistently reading these publications can give you tips on how to approach any investments and loans you may have. The one thing to take from all of this is: the higher the discount rate, the higher the cost of lending to you the borrower.

What Your Credit History Costs You

Have you ever considered how lenders determine if you are worthy for a loan, and what about all of this talk about credit scores, credit worthiness, and why should it matter? Well, to preface the explanation on why credit scores are important, let's use an example: Let's say you plan to apply for graduate school(If you are like me, you just want to make it through undergrad school). The school of your choice will have minimum requirements for you to meet. When they receive your application, letter, and other credentials, they will look to see if you meet the requirements and if you are a good fit for their school. The process is similar with lenders when they approve you for a loan, credit card, or whatever. They want to determine if you measure up to their criteria. These measurements will determine first if you get approved, but even more than that, what interest rate you pay and how much you can borrow.

Ok, why is your credit history important?

Financial institutions exist to make money, and they do this by charging interest and fees. In order to gain business, they offer different interest rates and fees to different people for a variety of reasons. These financial institutions consider your default risk(a measure to determine if you will pay your debt back), the cost of lending, and inflation(expectation of a rise in interest rates)in determining the interest rate you will pay. Only default risk is unique to you, and it is determined by your credit history. So the better your credit, the lower the interest rate you'll be offered.

As you can your credit history is vital in order for you to get the best rates on a loan. Your credit history shows what kind of default risk you have. To minimize your default risk, stay on time with your debt payments, lower any existing interest rates on current loans if possible, pay down your debt, and monitor your credit report as often as possible. If you are considering lowering your interest rates on a loan, you should consider loan consolidation, and if your credit history is less than perfect, you can get help through many credit repair specialists.

You should start now as it takes time to rebuild and build your credit history.