At a Glance

  • Thomas Brock, CFA, CPA, with over 20 years of experience, provides us with a critical eye on the state of American household debt as delinquency rates related to consumer debts, particularly credit card obligations and auto loans, continue to rise.
  • U.S. household debt is at an all-time high, interest rates are higher than they have been in over 20 years and delinquencies for certain types of consumer credit have reached alarming levels. In this challenging environment, limiting total borrowing costs is critical. Read on for some expert tips on how to do so.
  • To navigate this environment, you need to know how to limit your total borrowing costs, which include application and loan origination fees, interest expenses, and ongoing administrative fees.
  • The most effective strategies to limit total borrowing costs include improving your credit score, comparison shopping for loans and negotiating with lenders, exploring alternative borrowing options, and refinancing outstanding debt. That said, for any strategy to be effective, it must be underpinned by a prudent, risk-aware financial management framework.


According to the Federal Reserve Bank of New York, total U.S. household debt swelled to an all-time high $17.3 trillion as of September 30, 2023. The accumulation coincides with strong nominal spending and real gross domestic product growth over the past two years, which suggests it is manageable from a macroeconomic perspective.

However, it also coincides with rapidly rising interest rates, the byproduct of the Federal Reserve’s aggressive endeavor to tamp down extreme inflationary pressure that surfaced in 2021, raged throughout 2022 and, to some extent, persists today. This has made servicing debt very difficult for many U.S. households, as evidenced by soaring delinquency rates for credit card obligations and auto loans.

In this highly leveraged, rising interest rate environment, it is important to do everything you can to limit total borrowing costs. This article is designed to help you do just that – by providing general information on borrowing costs and highlighting some strategies to limit your exposure.

Understanding total borrowing costs

When most people think of borrowing costs, they focus on the interest charged by their lenders, but a more comprehensive perspective is needed. A holistic breakdown of the costs to be aware of are as follows:

  • Application fees and loan origination fees are expenses levied by a lender to assess your creditworthiness and, if approved, underwrite your loan. Many lenders do not explicitly charge for this aspect of the lending process, but some do. In the case of a mortgage, application fees and loan origination fees are standard. Additionally, you are likely to see attorney fees and credit reporting fees.
  • Interest expense is usually the largest cost of borrowing. Expressed as a percentage, it is the price a lending institution charges for the use of its money.
  • Ongoing administrative fees are charges levied by a lender to service your loan. Servicing a loan entails processing payments, maintaining records, producing reports and offering varying levels of customer service and technologically-advanced touchpoints.

Expert Tip from Thomas Brock: The annual percentage rate (APR) is a quick way to assess the total borrowing cost of a loan. The APR is a percentage-based expression of the annual cost of a loan, inclusive of interest expense and all fees. It is an all-in estimate of your annual expense, but it does not reflect the effect of compound interest.

4 strategies to limit total borrowing costs

Now that we have delineated the various costs borrowers face, let’s explore some ways to reduce these financial burdens. Four of the most effective ways to limit total borrowing costs are outlined below.

1. Improve your credit score

A fundamental way to reduce total borrowing costs is to improve your credit score, which is a numeric indication of your creditworthiness. Creditors focus on this measure (usually, either your FICO Score or VantageScore) to determine whether to extend your financing and, in the case of a favorable underwriting decision, what interest rate to levy, given your credit risk profile.

A relatively strong credit risk profile can save you tons of money over the long run, which makes monitoring your score and endeavoring to bolster it incredibly important. Five steps you can take to improve your score are outlined below.

  • Make all debt payments on time. Comprising approximately 35% of your credit score, payment history is the most important factor impacting your credit profile. A long history of making payments on time can substantially boost your credit score, but just a few late payments can ruin it.
  • Minimize credit utilization. Comprising roughly 30% of your credit score, credit utilization is another big determinant of your credit profile. With this factor, the key is to avoid using too much of your available credit. A rule-of-thumb is to never borrow more than 30% of your credit limit on any revolving loan.
  • Maintain existing credit accounts. The rationale is to keep old credit accounts open to maintain your credit history and minimize your overall credit utilization ratio. Closing an unnecessary account may seem like a responsible action, but it will harm your credit score. Comprising approximately 15% of your credit score, maximizing the average age of your credit accounts is very important.
  • Limit credit inquiries. Do not apply for too many credit opportunities, regardless of the incentives you are offered. Each credit application entails a hard credit inquiry, which will hurt your credit score. Incidentally this factor comprises about 10% of your credit score.
  • Maintain a diverse mix of credit. Comprising approximately 10% of your credit score, the diversity of your debt is a sign of creditworthiness. Maintaining a manageable mix of installment loans and revolving credit can enhance your credit profile. That said, opening new credit accounts to cultivate diversity is not recommended.

To get your credit score for free, take advantage of the following resource.

Confidently Take Control of Your Credit Score

Not just free credit score, but also get tools to drive tangible progress.

Not just free credit score, but also get tools to drive tangible progress.

2. Comparison shop and negotiate with lenders

Another way to ensure a lower total cost of borrowing is to comparison shop and negotiate with lenders when you are in the market for financing. Researching offers, analyzing terms and conditions and haggling with competing lenders takes time, but the hard dollar savings you can realize is well worth the effort.

If the negotiation process is uncomfortable for you, tap a financially savvy friend or family member to help you through the process. He or she can help you formulate a negotiation strategy and join you on ensuing discussions with potential lenders.

3. Explore alternative borrowing options

A third way to limit total borrowing costs is to be resourceful and explore non-traditional borrowing avenues, which means bypassing banks and credit unions. Many alternative options offer relatively simple application processes, comparatively low interest rates and a high degree of repayment flexibility. Three alternative borrowing options to consider are described below.

  • Online lenders are creditors that operate entirely via the internet, offering various types of loans, including mortgages, personal loans and small business loans. They leverage technology to streamline the application, underwriting and loan origination processes, and they achieve significant competitive advantages by operating without costly brick-and-mortar infrastructure.
  • Peer-to-peer lending platforms are digital platforms that directly connect borrowers with lenders, cutting out intermediaries. On these platforms, individuals or groups of individuals can lend money to specific borrowers. Borrowers utilizing such a decentralized ecosystem can benefit from potentially lower costs and highly customizable loan terms.
  • Government programs are usually designed to support specific groups of people or types of borrowers that are underserved by traditional lenders. Oftentimes, they allow for low credit score approvals and flexible repayment terms, but the array of programs is vast and constantly changing. So, some research is necessary to identify the programs available to you.

4. Refinance your loan(s)

A final strategy that could help you limit total borrowing costs is to refinance a loan. Essentially, this entails taking out a new loan to retire an existing loan.

For both installment loans and revolving loans, it makes sense when you can achieve a lower interest rate on your debt. For installment loans, it makes even more sense when you can implement a shorter loan term on your debt, thereby ensuring lower long-term interest expense. Regardless of your circumstances, the key is to make sure the future savings you can achieve via a refinancing will significantly exceed the upfront refinancing fees you will likely incur.

Fundamental financial management practices

The strategies outlined above are smart ways to limit your total borrowing costs, but they will not work unless you have a fundamentally sound means of managing your finances. This entails incorporating the practices outlined below.


Implementing a prudent budget is foundational for any fiscally-minded individual. A budget is a detailed financial tool that helps ensure your monthly cash inflows exceed your outflows.

Establishing one begins by identifying all your sources of income and categories of spend. Then, you need to formulate monthly estimates for each line item and, if necessary, make refinements to ensure a healthy cash surplus.

Once a sensible baseline is developed, you can track and evaluate actual vs. budget deviations. Doing so will enable you to manage spending behavior, bolster savings potential and improve your overall finances.

Managing risk

Alongside a budget, maintaining a vigilant stance in the face of interest rate risk – the possibility of suffering an adverse economic impact due to rising interest rates – is essential to optimizing your financial condition. There are a few ways borrowers can do this.

The most impactful tactic is to maintain a keen awareness of the forecasted trajectory of interest rates and adjust accordingly, which means borrowing on a fixed-rate basis when rates are projected to increase and borrowing on a variable-rate basis when rates are projected to decline. In some situations, implementing a hedge, such as a forward rate agreement or interest rate swap, can also make sense. These arrangements can mitigate downside risk, but they entail costs and are best suited for experienced financial professionals.

Closing thoughts

Since the pandemic, inflation has raged, household debt has mushroomed and interest rates have soared. Unless you are debt-free and floating in liquidity, it is not a good time to be a consumer. Fortunately, by improving your credit score, comparison shopping for loans and negotiating with lenders, exploring alternative borrowing options and refinancing outstanding debt, you can limit total borrowing costs and preserve your hard-earned money.

You do not need to employ all these strategies to improve your finances, but you must be diligent and budget-conscious to ensure the efficacy of the endeavors you pursue. Additionally, it helps to strive to continuously develop your financial literacy.


In December 2023, the Federal Reserve Bank indicated it expects to reduce the federal funds rate three times in 2024, which suggests a 0.75% reduction in the benchmark lending rate used for all types of loans. However, this messaging is unusual, considering the fact we are still experiencing persistent inflation for key goods and services and could experience a surge due to shipping complications caused by the Israel-Hamas war.

An installment loan entails borrowing a fixed amount of money for a specified period. Loan repayment is made via regular, fixed installments that include an interest expense component and a principal component. Once the full amount is repaid, the loan is closed. Examples include mortgages, auto loans and personal loans.

A revolving loan, which is commonly associated with credit card debt, provides a borrower with a predefined credit limit. Unlike installment loans, the revolving nature of the loan allows an individual to borrow, repay and borrow again – up to the predefined limit. Generally, a variable interest rate is only charged on the outstanding balance, but minimum monthly payments are mandatory.

Debt consolidation is a refinancing strategy that entails taking out a new loan to retire multiple existing loans. In an ideal circumstance, it lowers total borrowing costs, shortens the duration of debt obligations and streamlines administration.

Learn more: What is Debt Consolidation?