The credit card interest rate is notorious for being too high. Among the other types of debt, this is the one with the highest rate. This is the reason why you need to understand it carefully so you do not waste money paying interest on all your credit card transactions.
The truth is, there are several ways for you to avoid the burden of your credit card rate. You can simply pay off your balance in full and within the grace period of your billing cycle. It is only when you allow your balance to be carried over to the next month that the interest amount will be added and capitalized into your credit card debt. This is done through the finance charge.
According to a study published on NBCNews.com, one out of three card holders carries credit card debt to the next month. The data revealed that this statistic is higher compared to 2015. It also tells us that carrying over a balance is costly because of the high credit card interest rate. With the average rate of 15%, this can end up costing you unnecessarily. The thing is, this is a cost that you can avoid if you only know what to do once your interest rate gets too high.
We are not really sure how the economy will hold up in the next few years but one thing is for sure, there is a possibility that the interest rate will go up. You need to start acting now before the authorities make a move to raise the interest rate on your credit cards.
5 immediate steps when you have a high-interest credit card
According to ValuePenguin.com, the average credit card interest rate by the end of 2015 was 13.66%. However, the type of credit card that you have and the perks will dictate how high it is. The data revealed that cash-back credit cards have the highest interest rates at 20.9%. It is followed by student credit cards with 19.8% and then by travel rewards card with 15.99%. The credit card with the lowest interest rate is business credit cards with 15.37%.
Of course, these rates can go up or down – depending on what the market shows. But before these interest rates go up or down, you need to start making your move. There are 5 simple steps to take when you realize that your credit card interest rate is already too high.
Step 1: Stop using your cards.
Once you realize that the interest rate on your credit card is already too high, then you need to stop using it. Do not worry – this is only temporary. You can still use your card but you have to make sure that you will do something about the interest rate first. Until you have come up with a plan, you need to stop adding to the balance of your credit card – at least, this is applicable if you carry over a balance to the next month.
Step 2: Check your credit score.
The next step is to check your credit score. Most of the time, people with a high credit score are classified by creditors and lenders as low-risk borrowers. If you have a low score, then you become a high-risk borrower. You need to know where you fit in because that will determine your strategy when you get to the fourth step. To ensure that things will work in your favor, you should have a high credit rating.
Step 3: Check out other credit cards.
The third step is to do your research. Check the other credit card companies to see how your credit card interest rate fare against theirs. If you find card being offered with a lower interest rate, then take note of these cards. According to a study done by JDPower.com, some people make the mistake of prioritizing the rewards program of their card. While there is nothing wrong with this, it might be costing you unnecessarily because of the high-interest rates. If you cannot maximize the rewards on the card, you might be better off with a card that offers a low-interest rate without any reward. Do your research so you will know the other options that you have in terms of your card.
Step 4: Talk to your creditor.
Once you know your credit score or you are sure that you have a high score, it is time to pick up the phone and call your creditor. What you are going to do is to negotiate for a lower interest rate. Some people do not know that this is possible. Well, you can ask them to lower it but you need to give them a good reason to do it. If you have a good score, that means you had been paying your dues responsibly. That makes you are a good client. If you threaten to leave them to open a new credit card account with a company that offers a lower interest, they might be more inclined to lower your rate.
Step 5: Decide whether to transfer or pay off your balance.
After step 4, there are only two ways that things can go. One is your existing creditor will agree to lower your credit card interest rate. Once they do this, you should start paying your dues aggressively. The other scenario is they will refuse to lower your rate and let you go and open another card. At this point, you have the option to apply for a balance transfer card. We will discuss how you can lower your credit card rate later on. Regardless of how it ends up, the important thing is to pay down your credit card balance so you do not have to worry about the interest rate. If you do not carry over a balance, you would not care if the interest rate goes up or down.
Here is a video that further explains how the credit card interest rate plays a role in your payments.
3 ways you can reduce the interest rate of your credit card
Now that you know what to do when you realize your credit card interest rate is too high, it is now time to determine the 3 ways you can reduce your rate. What you will choose among the three will depend on your specific financial situation.
Negotiate with the creditor. The first option is to negotiate your credit card interest with the creditor. Some people will find this to be quite intimidating – but it is not really that hard to do. You might be surprised that the creditor will immediately agree to lower your rate when you ask them the first time. You would not really know unless you try. Just make sure to tell them about your good payment behavior and high credit score. These two can really help you win your case.
Balance transfer. The second option is balance transfer. You will look for balance transfer cards that offer a 0% introductory rate. For a balance transfer fee that is a small percentage of your debt, you can enjoy a few months of 0% interest. That means whatever you pay during those months will only go to your principal balance. To make this option effective, you should have an aggressive debt payment plan during the 0% period. After this time, the card will change into a high-interest rate card – so make sure you take advantage of the first few months.
Debt consolidation loan. Finally, you have debt consolidation loan. One of the reasons why this is a great debt solution is because of the lower interest rate – at least, it is lower compared to the high credit card interest rate. A personal loan is low but a home equity loan is even lower. If you have a good credit score and you can avail of a loan with a very low interest, you can really save a lot in the long run. It will be more beneficial if you shorten the payment terms. What you will pay will end up being much less than what you would have with your credit cards.
Common questions about credit card interest rate
Question: Why do you need to know your credit card interest rate?
Answer: This interest rate can affect your payments – it can either make it higher or lower. You need to be aware of this credit card characteristic so you can make smart decisions about how you will use and pay off your credit card debt.
Question: How does your credit card interest rate affect your payments?
Answer: It affects your payments through the finance charge. If you carry over a balance, the interest rate of your card will be calculated against that balance. Whatever the amount that is computed is the finance charge and it will be added to your existing balance – thus making it bigger. The higher the interest rate, the higher the finance charge and the higher the amount that will be added to your existing balance.
Question: Why is my credit card interest rate high while others are low?
Answer: It all depends on your credit score. If you applied with a good credit score, you may be given a low-interest on the credit card. A bad score, on the other hand, will only give you a higher interest rate.
Question: Is there are 0% credit card interest rate?
Answer: Yes there is. These are usually offered by credit card companies to entice credit card borrowers to transfer their account to them. Just remember that this is usually over a short period only. After the promo period, the 0% credit card interest rate will go up.
Question: How is the credit card interest rate calculated in banks?
Answer: Banks have the liberty to raise their rates – but they are required to inform their clients about it. Usually, their decision to raise the rate will depend on the market conditions, competition, and the Federal Reserve policies.