The average credit card interest rate is 17.54%. Take a minute to really think about that.
For every dollar you owe at the end of the month, the average credit card can add more than 17% to your bill, depending on how long you maintain the balance. No rewards program comes even close to making that up. Getting 2%, 3%, even 4% cash back is almost a rounding error compared to what you’ll spend on those kind of finance charges.
Now, if you manage to pay your credit card off every month then this problem won’t apply. Most, if not all, cards on the market only charge interest on accounts that carry a balance from month to month. If you regularly pay off your entire balance at your card’s due date then you don’t really need to worry about the interest rate.
Most people do carry a balance though. If that’s you, here’s what you can do to try and lower those interest payments.
What Is Credit Card Interest? What Triggers It?
Interest is the amount that your credit card charges when your account has an unpaid balance left at the end of each billing period. It’s important to note that this is not the same as a late fee. Any given credit card will set a minimum payment that you have to meet in order to avoid triggering late fees. That minimum payment is typically calculated as a percent of your total balance. Missing the minimum payment, or paying less than that amount, will lead to a late fee.
For example, say your minimum payment is 5% of the total balance. During one month you spend $100 on your credit card. This would create a minimum payment of $5 to avoid triggering late fees and penalties. The remaining $95 would be your balance and your credit card will charge interest on it.
Interest rates on a credit card can change, sometimes unexpectedly. Your issuer must always give notice before changing your rate, but most consumers still don’t see it coming. Representative factors that can trigger a rate change include:
Late or missed payments;
Changing credit status;
Expiration of an introductory offer;
Larger economic conditions;
Credit card company business decisions.
You’ll notice that the last two are forces you have no control over. You can do something after the fact though.
Research Your Options
This will come up again and again in this article: do your research.
The first step to lowering your credit card interest rate is to understand what the marketplace looks like for you. Look up the kind of cards you want and base your research on your credit score and current income. What you want to know is what the market will offer someone with your profile, and how interested you are in those alternatives.
Of course, during this process make sure to check your own credit score. It won’t do you any good to do all that research on a best-guess without knowing whether those unpaid library fines actually caught up with you.
Option One: Negotiate
This is a particularly good option for consumers with good credit and a longstanding relationship with their credit card company.
Not many American consumers think about negotiation. Imagine if you tried to walk into a McDonald’s (MCD – Get Report) and bargain for a cheeseburger. You’d get thrown out of the store. This simply isn’t how most companies do business. Credit cards, however, will negotiate.
Start the process with your research from above. What interest rates do comparable cards offer someone with your profile? Do they offer the same perks or even better ones? Essentially, when you ask your credit card company for a rate change, where should you start?
Then do what shockingly few of us actually will: Call up and ask. Most people don’t realize how rare it is for someone to directly ask for what they want, and it works surprisingly often.
Find the customer service number on the back of your card and make the call. Be polite, and don’t be afraid to call back if somebody says no. This is a negotiation after all, sometimes it takes a little while getting to yes. Ask for a better deal than you could get elsewhere then be willing to bargain up to what your research said you should expect. If most other cards will offer you a 12% interest rate, start by asking for 10%. If you currently have a 20% rate, ask for 15%. It’s worth a try after all.
As an added bonus, negotiating helps you to avoid the credit check process of opening a new credit card, which can hurt your credit score.
Option Two: Get a Balance Transfer Card
Balance transfers are when a credit card allows you to transfer the balance from a former account into the new one. Basically, you are using one credit card to pay off another.
Most cards allow you to do this in hopes of luring customers from competing products, however, only some actively try to capture this market by offering competitive rates for customers who transfer a balance. These are often referred to as “balance transfer cards.”
A balance transfer can have several upsides. Many cards that offer a balance transfer will give you an introductory interest rate and (sometimes) even some perks for enrolling in the new card. Typically, this means automatically reducing your interest payments to zero for up to the first 18 months, which on its own might save you a significant amount of money. (Readers should note that this is not always the case. In particular, the more desirable the card the less likely it will offer you a competitive balance transfer interest rate.)
It’s important to note that credit cards also charge a fee for transferring balances. This is usually somewhere between 3% – 5% of the total balance. That’s not necessarily cheap, especially if you have a substantial balance on your credit card. That said, the introductory interest rate offered by most balance transfer cards will almost always save you significantly more in interest than you’ll spend on the transfer fee.
Option Three: Get a New Card
Perhaps none of the balance transfer cards available interest you. As we mentioned, often the best cards on the market (the ones with the most significant rewards programs) don’t offer competitive balance transfer rates. If that’s the case, your best option may simply be to open up a second credit card and stop using your first one.
Now, you may affect your credit score by opening up a new line of credit. This isn’t the end of the world, but you should keep it in mind. Just don’t go applying for a half dozen cards at once.
This is also not a good option if you have a balance on your previous card that you struggle to pay off. Consumers who owe a lot of money to one credit card company absolutely should not begin accumulating debt with another. If this is the case, your best option is to negotiate or seek out a balance transfer card to get your payments in hand.
However, if you can manage the payments on your existing card, but they just won’t make the right offer, then there’s nothing wrong with taking your business elsewhere. Open up a new card, switch all your spending to that one and finish paying down the balance on your previous account. It’s not elegant, but it works.
Finally: Work On Your Credit
If none of these options succeed, there’s probably a reason.
If you can neither find a better card nor get any movement from your existing one, the odds are that you have some troubles in your credit history. Late payments, missed payments or a poor credit score can all make it difficult to qualify for a better interest rate. No other credit card companies will offer you a good product, and your current company knows it. You have a weak bargaining position.
So the best option is to strengthen it.
Spend several months working on your profile. Get a credit report and pay close attention to everything dragging down your score, then begin to work on those issues. Do your best to pay down your existing balance and emphasize making your payments on time. Work on this for several months, then try it all again.
Keep at it until it works.
It’s never too late – or too early – to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet’s Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.