How can I lower my credit card interest rate?
Credit cards can be a great convenience and offer great perks, like cash back and other rewards. They can help you streamline your monthly cash flow by letting you charge your expenses throughout the month and pay it off in one lump sum the following month, and they often include rewards and other perks along the way.
On the flip side, credit cards also come with high interest rates compared to most other debts. If you tend to carry a credit card balance, interest charges can more than double the original charge if you make only the minimum monthly payment.
If high interest rates cause you to stress over your credit card bills, there are ways to lower your credit card interest rate — also known as annual percentage rate (APR) — which reduces the cost of your debt and helps you get out of debt quicker.
How Credit Card Interest Affects Your Debt
Your interest rate, which is the finance charge the credit card company applies to your account’s balance each month, has a far-reaching impact on your finances. It impacts your minimum monthly credit card payment, how long it’ll take to pay off your debt, and how much putting an item on a credit card will cost you.
For example, if you purchase a $1,000 television on a credit card with a 17% interest rate, your minimum monthly payment — assuming a minimum payment calculation of the accrued interest plus 1% — would be $24.17 per month. If you stuck with this minimum monthly payment, it would take you 111 months to pay off the debt and cost you $857.52 in interest fees.
With a rate reduction to just 15%, the minimum monthly payment would fall to $22.50 per month. If you made only the minimum payments, you’d pay off the debt in 106 months and shell out $729.18 in interest payments. That’s a saving of five months and $128.34.
How Credit Card Companies Determine Your Interest Rate
Most credit card companies use a variable APR, meaning the interest rate will go up or down depending on the particular “index” the credit card company follows. Most credit cards will follow the prime rate as their index.
While banks can set their prime rate themselves, many use the Wall Street Journal’s (WSJ) posted prime rate. The WSJ derives its prime rate from the corporate loan rates of the 10 largest banks in the U.S. If at least 70% of these banks change their rates, the WSJ changes its prime rate.
Credit card companies use the index as the base rate then apply a margin — a number of percentage points above the index — to set your interest rate. For example, your interest rate may be the prime rate plus a 10-point margin. So, if the prime rate was 3.25%, your credit card APR after the 10-point margin would be 13.25%.
Credit card issuers base the margin on a cardholder’s creditworthiness. If they have good credit and are a low credit risk, they may get only a 10-point margin. If you’re a higher-risk individual with a fair credit score, they may get a 13-point margin.
Because most credit cards have variable APR, expect periodic interest rate increases. With interest rate increases also come higher minimum monthly payments.
How to Get a Lower Credit Card Interest Rate
If you’re in a financial bind and need to reduce your interest charges or simply want to pay less interest on a purchase, there are six ways to lower your credit card interest rate.
1. Negotiate With Your Credit Card Company
Yes, you can negotiate with your credit card company to reduce your interest rate. Call the customer service line listed on the credit card and explain your desire to lower your interest rate to the representative.
Before calling, though, build a solid case for a reduced interest rate. Some points to highlight in the negotiation process include:
- Time You’ve Been a Customer. If you’ve been a customer of that credit card company for several years, use the card regularly, and have a great payment history, this can be a good bargaining chip.
- Recent Credit Score Improvements. If you had a lower credit score when you got the card and have made great strides to reach good or excellent credit, the credit card company may lower your interest rate.
- Competitive Offers. We all receive countless credit card offers via mail and email. Use these to your advantage — particularly balance transfer offers — by letting the credit card company know you’ve received lower interest rate offers from competitors. Credit card companies will often offer a lower interest rate to keep you using their card.
- Temporary Hardship. Sometimes finances are a little tight, and you need some help. If you let the customer service representative know you’re struggling to pay your credit card bill, they may offer to temporarily lower your interest rate.
While negotiating your rate can be rewarding when you’re successful, not all credit card companies are willing to negotiate their interest rate.
That said, credit card companies want to retain their customers and often have alternative offers. For example, the representative may not offer a permanent APR reduction, but they might offer 0% financing for 12 months or waive your annual fee this year.
2. Credit Counseling
If you’ve run into a rough financial patch or just got yourself too deep into debt, a credit counseling agency can step in and handle the negotiation for you. Accredited credit counselors know what they can and cannot negotiate and how to get you the best offers to help you get out of debt.
The credit counselor reviews your credit report and finances with you and gets an understanding of your financial goals. After this review, the credit counselor goes to work negotiating with the credit card companies. On top of negotiating your interest rates, the counselor also tries to get the credit card company to waive various fees, including late fees, over-the-limit fees, and past annual fees.
With the debt negotiated, the credit counselor puts together a debt management plan (DMP) that outlines your monthly payment, the counseling agency’s fee, and the repayment terms. If you accept the plan, you must close all the credit cards included in the DMP and begin making payments to the agency. The agency distributes the funds to your credit card companies.
While a credit counseling company can be helpful, closing your credit cards is a big disadvantage to a DMP. Closing a credit card you’ve had for a long time negatively impacts your length of credit history, which is 15% of your FICO score. Also, even though credit counseling agencies are often nonprofit organizations, they usually charge a small monthly fee for their services.
3. Debt Consolidation
Debt consolidation is a great option to a lower APR when negotiations aren’t enough and credit counseling won’t work for you.
A debt consolidation loan is a personal loan with an interest rate that’s usually lower than most credit cards. When you get a debt consolidation loan, you use it to pay off all or some of your credit card debt, then repay the loan.
The biggest benefit to a debt consolidation loan is the interest savings. For example, if you have $5,000 in credit card debt at 18% interest, you could pay up to $6,923.09 in interest over the 273 months it’d take to repay the debt using only the minimum monthly payments.
If you were to pay off that debt with a five-year consolidation loan at a 10% interest rate, you’d pay only $1,374.11 in interest over the term of the loan.
Also, because you’re paying off multiple credit cards with one loan, you’ll make just one payment per month to the lender instead of several smaller payments to all your credit cards. Plus, most debt consolidation loans have fixed interest, so your interest rate and monthly payment remain consistent.
The big downside to a debt consolidation loan is you usually need good to excellent credit to get approved for one with a worthwhile interest rate. Also, because debt consolidation loans typically only offer up to five-year repayment terms, your minimum monthly loan payment could be higher than the minimum monthly credit card payment.
4. Balance Transfer Credit Card
If you don’t have a lot of debt but still want to save on interest, a balance transfer credit card may be right for you.
Many credit card companies offer low- or no-interest balance transfer deals as introductory offers or to entice you to use a card that’s remained idle for a while. These promotional offers generally last 12 to 18 months.
If you can land a 0% interest balance transfer offer with a high enough credit limit, you can move your balance from a high-interest credit card to the balance transfer card and pay it off throughout the promotion without paying a dime of interest.
While there may be no interest during the promotional period, there is often a 3% to 5% balance transfer fee. The balance transfer card issuer will calculate this fee based on the amount you transferred to it and add it to your balance. So, if you transfer $1,000 onto a balance transfer credit card, your balance after the fee would be between $1,030 and $1,050.
With a 0% intro APR balance transfer card, you can easily determine how much you need to pay per month to pay off your debt before interest starts accruing again. Simply divide the balance, including the balance transfer fee, by the number of months in the promotion.
For example, if you transferred $1,000 to a 0% interest balance transfer card with a 5% balance transfer fee and a 12-month promotional period, you’d divide $1,050 by 12 to determine you must pay $87.50 per month to pay it off before interest fees begin to accrue.
There is considerable benefit to 0% interest, but a balance transfer credit card has a few downsides.
The biggest issue is accessing one, because you’ll need a good credit score to get approved for a 0% interest balance transfer credit card. Also, this is temporary relief. Once the promotional period ends, the balance transfer credit card’s interest rate will shoot up to standard credit card interest rates.
Pro tip: One of our favorite balance transfer credit cards is the Citi® Double Cash card. Not only will you receive 0% APR on balance transfers for 18 months, but you’ll also receive 2% cash back on purchases. Learn more about the Citi Double Cash card.
5. Home Equity Line of Credit
A home equity line of credit (HELOC) turns the equity in your home — your home’s assessed value less any mortgages or liens against it — into a line of credit you can withdraw from. So, if your home is worth $400,000 and has a $200,000 mortgage balance remaining, you have $200,000 in equity.
Most banks cap your combined home loans — the original mortgage plus your HELOC — at 85% of the home’s value, but some will allow up to 95%. So you could get a $140,000 to $180,000 HELOC in the example above.
You can use a HELOC for virtually anything, including paying off your credit cards. Simply make a withdrawal from the HELOC large enough to pay off your high-interest credit cards and use the money to pay down your balances. HELOC interest rates go as low as 3%, making it 10 or more percentage points lower than most credit cards.
HELOCs also often have flexible terms, including a draw period where you may pay only the interest on the amount you withdrew. After the draw period closes, you enter the repayment phase, which is when the lender will expect full principal and interest payments. That said, you can make principal and interest payments during the draw period if you like.
The key downside to a HELOC is your home becomes collateral for the line of credit. If you run into a rough financial patch and can’t repay the HELOC, the lender could foreclose on your home. Another downside is your home’s equity can limit the amount of credit you qualify for.
There may also be additional fees tied to the loan, like an origination fee, appraisal fee, application fee, and others. You’ll want to consider these fees when deciding if a HELOC is the right option for you.
6. Home Equity Loan
A home equity loan is a lot like a HELOC, as it’s a loan based on the equity in your home, and most banks will cap your combined loan amount — the original mortgage balance plus the home equity loan — at 85% to 95% of your home’s value.
Unlike a HELOC, though, a home equity loan is a fixed-term, lump-sum loan instead of an open line of credit, meaning you can only use it once, and the repayment period starts immediately.
The big benefit of a home equity loan is the potential to get an interest rate as low as 3%. This is significantly lower than most credit cards and can save you big money.
For example, if you have $5,000 in credit card debt at 18% interest, you’ll pay up to $6,923.09 in interest over the 273 months it takes to pay off the debt using the minimum monthly payment. With a five-year home equity loan at 3% interest, you’d pay just $390.61 in interest.
Like a HELOC, the big downside is the risk of foreclosure if you default on the home equity loan payments. Also, your home’s equity limits the loan amount. If you recently financed your home or a financial crisis causes a sudden drop in home values, you may not have enough equity to get approved for a home equity loan — even with excellent credit.
Other downsides include all the same potential fees as a HELOC, including origination fees, application fees, and underwriting fees.
Credit card debt can become stifling, especially when you consider interest charges make up a large portion of your minimum monthly payments and only a tiny part of your payment goes toward the principal balance.
By lowering your credit card interest rate, you not only reduce these fees, but you can also get out of debt quicker. The key is determining which interest-rate-reducing process is right for you.
With the right process selected, you can take control of your credit card debt and the interest that comes along with it.