How Can I Lower My Credit Card Interest Rate?

Many consumers are riddled with credit card debt thanks in part to APR that is through the roof, making it very difficult to pay down debts and get back in the black.

So you may ask yourself, “How can I lower my credit card interest rate?”

Credit card issuers aren’t in the business of losing customers, and if they feel the threat of you leaving them, they’ll do whatever they can to keep you “on-board.”

It’s clear they want our business, as evidenced by the number of offers received in our mailboxes on what feels like a daily basis, and the bountiful array of credit card advertisements found on nearly every website on the Internet.

And though reducing your interest rate may cut into their profits, losing you (and your debt) altogether will have a far greater impact on their revenue.

Call Your Card Issuer and Ask for a Lower Interest Rate

That said, if you’re a good customer with a solid payment history and high credit card APR, call your card issuer immediately to ask about a rate reduction.

It’s a very standard practice, and one that pretty much any customer service representative can handle without asking a supervisor.

When you do call, make sure you’re assertive and clear about what you want. Ask for more than you think they’ll offer, and you should end up with a solid rate reduction.

Tell them that you have other, better offers that you’re actively considering if you’re forced to continue paying the APR they currently offer.

The second they hear that you’re considering moving your debt elsewhere, they will likely oblige to your demands, and lower your rate.

The changes should be instant, and you’ll start saving money immediately. After all, why pay 30% APR when it could be as low as 10-15%.

I’ve even heard that some customers have had their 0% APR introductory rate extended simply by asking for an extension.

The annual savings could be in the hundreds or even more if you carry a significant amount of debt, and should allow you to pay off your debt a lot faster and more economically.

Either way, don’t be afraid to ask for a discount, it’s your right as a customer and it only takes a few minutes.

Try a Credit Card Balance Transfer

There’s another alternative if you want to save even more money.

If possible, consider executing a credit card balance transfer to move all your existing debt to a 0% APR credit card.

Doing so will help you avoid finance charges and interest altogether for a specified period of time, typically 12 months or longer.

During that time you can set up a plan of attack to pay off your credit card debt.

Just know that the interest rate will jump to your purchase rate at the end of the introductory period, so tackle the debt while it’s still interest-free!

Oh, and one other cautionary mention.  If you go with the first option above, make sure your credit card issuer lowers your APR for your existing balance AND future purchases.

If they fail to do so, you’ll just be paying the lower APR balances off first thanks to negative payment hierarchy, assuming you continue to make purchases with the same credit card.

Read more: How to transfer credit card balances with bad credit.

American Express Plum Card

In just a couple days, the “American Express Plum Card” will be released, promising to revolutionize the way business owners use credit cards.

Put simply, the Plum Card allows businesses to manage cash flow with the use of an credit card, instead of worrying about having cash on hand for purchases large and small.

Plum Card Has Two Payment Options

plum card

Say you charge $5,000 on your Plum Card for business expenses in a given month, and you have the available funds to pay it all off immediately.

If you pay off that balance in full within 10 days of your statement closing date, you’ll receive a 1.5% “early pay discount”, or roughly $75 back in the example above. That $75 will work as a statement credit, and will be applied to the following month’s balance.

You don’t even need to pay in full to receive the early pay discount – as long as you make at least the minimum payment within that 10-day window, you’ll get 1.5% back on the amount you pay early.

Note that eligible purchases do not include returned items, American Express Gift Cheques or American Express Travelers Cheques, or deferred payments.

With the American Express Plum card, you can also defer credit card payments by as much as two months from the statement closing date, without paying interest or finance charges.

Here’s how the deferred payment option works:

plum details

Say you charge $5,000 on your American Express Plum Card. Once your billing statement arrives, you must pay at least 10% of your outstanding balance by the “Please Pay By” date on your billing statement.

As long as 10% is paid by that due date, you can carry the remaining portion of your balance and pay it off at the next month’s “Please Pay By” date without incurring any finance charges or interest.

*This is assuming you aren’t carrying any previous balances from prior months.

Technically you could keep doing this each month, but you’d need to pay the previously deferred payment plus 10% of new activity.

Plum Wants to Replace Cash

To sum it up, the American Express Plum Card is about flexibility and managing cash flow.  It appears the move is a bid for American Express to capture more of the business to business market where cash is sometimes king.

But before you get too excited, take note that the charge card is intended for businesses with revenues in the 6-7 figure range.

There’s even an application waiting list, though that’s likely just part of the buzz machine.

The annual fee for the American Express Plum Card is $250, though it’s waived for the first year. Additional Plum Cards come free of charge.

The late payment fee is 1.5%, then 2.99% of the past due amount, with a minimum charge of $35. In other words, don’t pay late.

[How much does missing your credit card payment lower your credit score?]

And there is a 2.7% foreign transaction fee, another bummer considering it’s a business credit card that could well be used worldwide.

Finally, the Plum Card does not have a pre-set spending limit, meaning purchasing power adjusts with card use, your payment history, and financial profile, and is likely reserved for businesses with great credit only.

See also: American Express Blue for Business

(photo: Ádám Dudás)

Watch Out for Negative Payment Hierarchy

Let’s get one thing straight. Credit card issuers aren’t your friends. They are your business partners, and they’re in business to make money by lending you money.

In fact, most credit card issuers set things up so you pay off the lowest interest rate charges first, and the highest interest rate charges last. Read that a couple times…let it sink in.

At first glance, it doesn’t sound like a big deal, or necessarily a bad deal, but upon closer inspection, you’ll see why many card issuers choose this lucrative payoff structure.

Imagine you execute a balance transfer, moving $2,000 in credit card debt to a new credit card that offers 0% APR for 12 months on balance transfers, but a sky-high 25.99% APR on purchase transactions.

Then you decide to make a medium-sized purchase with that new credit card, adding a $250 charge to the existing $2,000 balance.

Over the following 12 months, if you continued to carry and slowly pay off that $2,000 balance at 0% APR, you’d be accruing interest (credit card finance charges) on the $250 purchase if your card issuer uses the all too common “negative payment hierarchy” structure.

What Is Negative Payment Hierarchy?

In a nutshell, negative payment hierarchy is the practice of allocating credit card payments to the highest-APR balances, followed by lower ones.

Because the purchase APR of 25.99% is higher than the 0% APR offered on the balance transfer, it won’t be paid off until the $2,000 balance transfer balance is wiped out entirely.

In other words, you’d be stuck paying nearly 26% interest on that $250 until the $2,000 is paid off.  That could mean months and months of accrued interest on a seemingly innocuous purchase, leading to a nasty surprise down the line.

And it could get even worse if you made other purchases and added on to your purchase debt while still carrying balance transfer debt.

Clearly this payment structure favors the credit card issuers because they can squeeze out as much interest as possible, despite your well-intentioned efforts to pay off your debt.

For this reason, it is recommended that you don’t use the credit card you reserved for the balance transfer to avoid any extra charges that will throw off the 0% APR benefit of the card.

To avoid confusion, use another credit card for purchases, that way you won’t get stuck with a high-APR charge waiting in line to be paid off behind your lower APR charges.

Read more: Carrying a credit card balance doesn’t help your credit score.

Five Credit Card Fees You Can Avoid

As you probably already know, credit card issuers make much of their money on collected interest and outrageous fees.  It seems everyday credit card companies are coming up with new fees to charge customers.  Take a look at five common credit card fees you can easily avoid with some common sense and responsibility.

Credit card late fees

Credit card late fees have risen roughly 150% over the last ten years, with some late fees as high as $39.  You’re probably already getting charged credit card finance charges, so why let them tack on more debt.  Get alerts sent directly to your e-mail address so you know exactly when your payment is due.  These services typically give you enough advance notice to ensure the transaction posts before the due date.

Over-the-limit fees

For some reason, banks will let you use your credit or debit card to make purchases despite not having the available funds.  Then they’ll nail you with an over-the-limit fee.  What you can do to protect yourself is request that ATM withdrawals, debit purchases and checks be approved only if you have sufficient funds in your account.  Banks such as HSBC, Wachovia and Washington Mutual allow this.  You can also enlist overdraft protection, although be warned that this will only minimize fees, not eliminate them completely.

Balance transfer fees

Many credit card issuers charge you a fee to take on your existing credit card debt.  Your debt is typically their reward, so look for a no fee balance transfer credit card if you can.  Some still exist, although they’re much harder to find these days amid the credit crunch.  Otherwise you’re looking at fees of 3% of the balance up to $75 or even more.  Discover currently has a no fee balance transfer.

Foreign-conversion fees

Most credit card issuers charge a foreign conversion fee.  Visa and Mastercard charge 1% of the total purchase price on all foreign conversions, along with whatever the credit card issuer charges, which is typically another 2%, totaling 3% of the purchase price.  Get a Capital One card or a Discover card, which carry no foreign-conversion fee.  Pretty much everyone else does, so if you travel a lot, grab one of these credit cards and make sure it’s accepted in the country to plan to travel in.

Credit card payment fees

Some credit card issuers allow customers to pay their bills over the phone, though they typically tack on a fee as well.  These pay-by-phone fees can range from $5-$20 or more, and consumers typically only use these services because they don’t want to bother sending a check by mail, and they haven’t taken the time to setup the online payment method.  Make sure you take advantage of the credit card issuer’s web tools, which allow you to store payment information such as your checking account details so payments can be sent for free in seconds online.

Read more: Are credit cards with annual fees worth it?

A Lesson in Credit Utilization

A friend of mine recently notified me that his credit score plummeted nearly 100 points from the last time it was updated. He is enrolled in a credit monitoring program, so he receives alerts when his credit scores fluctuate.

Naturally, I asked him why he thought his credit score could have dropped so dramatically in such a short period of time. He was quick to explain that he hadn’t paid any bills late, and that nothing negative was being reported on his credit report.

We dug a little deeper and he began to tell me about some recent large purchases he had made on several of his credit cards.

It turns out he spent about $15,000 in the matter of a couple weeks, which was nearly 50% of his total aggregate credit line (all credit card limits combined) of roughly $30,000.

Bingo! That was the problem. He essentially used up half of his available credit in a matter of weeks, a big red flag to his creditors and the 3 major credit bureaus.

Think Like the Creditor

Imagine if you knew someone who was going around asking people to borrow money for a new investment. And that someone had already borrowed $15,000 from five other people.

There’s a good chance you’d be less inclined to offer that someone money knowing the person already had $15,000 in outstanding debt.

That’s the same way creditors think, and the reason why credit bureaus depress the credit scores of borrowers with high amounts of outstanding debt.

In fact, 30% of the FICO score algorithm is based on “credit utilization”, which relates to the amount owed on accounts, number of accounts with balances, and proportion of credit limits used.

When my friend went on that spending spree, other potential creditors were given a veritable warning to limit new credit in the form of a much lower credit score, based on the assumption that someone with a greater amount of debt will be less likely to pay back additional debt that is accrued.

25% May Be the Magic Number

The big question is, “How much is too much?” FICO doesn’t reveal everything about their scoring algorithm, but they did note once that those with the highest credit scores tend to keep their “credit utilization ratio” below 25% on their credit cards.

So if you’ve got a $10,000 credit card limit, keeping it below $2,500 may be best, as far as your FICO score’s health is concerned.

As far as VantageScore goes, they say the rule of thumb is to keep balances below 30% of the credit limit on any given account. In our preceding example, that would mean keeping balances below $3,000 on a $10,000 limit.

Clearly my buddy didn’t adhere to either of these rules, and his credit score suffered big time as a result.

Playing the Utilization Game

It’s also important to note that credit utilization is measured via individual credit cards along with your overall aggregate credit limit.

For example, let’s say my same friend has five open credit cards.  His total credit limit is $30,000 and he’s using $15,000 of it.

– Credit Card A: $5,000 limit, $4,000 used
– Credit Card B: $10,000 limit, $9,000 used
– Credit Card C: $2,000 limit, $0 used
– Credit Card D: $7,000 limit, $0 used
– Credit Card E: $6,000 limit, $2,000 used

So we already know he’s using 50% of his total available credit, which is bad. But he’s also using 80% of his credit line on Credit Card A and 90% on Credit Card B. That’s also not good.

He has two cards open that aren’t being used, which helps his overall ratio. These should stay open to keep his credit score from tanking even more.

After all, if he closed them he’d lose $9,000 of his $30,000 aggregate credit limit, and his overall credit utilization would rise to nearly 72%.

For the record, you can also get dinged for having too many credit cards with balances over zero dollars, so keeping those cards open and at $0 is helpful as well.

As you can see, it’s tricky to keep balances low and utilization rates down across multiple cards without triggering some kind of penalty from the credit score makers.

You’ve Got to Tackle the Debt Eventually

The takeaway is that he’ll need to eliminate the debt as opposed to shuffling it to improve his credit scores.

And though his credit score was dinged because of his recent spending spree, over time his scores will rise back up as long as he sheds the debt and makes timely payments.

[Carrying a balance doesn’t help your credit score.]

In other words, it’s really just a temporary depression, but one that can cost you a significant amount of money if you apply for new credit or important loans around the time of the drop.

That’s why it’s imperative to avoid large purchases before and during important transactions such as auto leases/loans and mortgage applications.

You won’t want bad timing to hurt you in any way, especially if it means a higher interest rate or an outright declined application.

Keep an eye on your debt and make sure it stays below the key levels mentioned above, and never max out your credit cards!  Sure, there will be times when you need to make sizable charges on your cards, but work on knocking those balances down as quickly as possible to ensure your credit scores stay in tip-top shape.

Read more: How to raise your credit score.

(photo: procsilas)

Capital One to Report Credit Limits to Bureaus

Capital One has announced that it will report credit limits on its credit cards to all 3 major credit bureaus amid criticism from consumer and industry groups.

The move will also help improve card holder’s credit scores, which likely suffered from a lack of information regarding the credit lines many had established with Capital One.

The decision to report credit limits should boost the credit scores of many Capital One card holder’s because it will reflect an increase in the amount of available credit borrowers have.

That is one of the measures used by Fair Isaac to determine a consumer’s credit score, and a rather important one.

In the past, Capital One used the card holder’s highest balance as the credit limit it would report to the credit bureaus.

This in turn would cause the credit bureaus to believe that the credit card limit was the highest amount ever charged on the card.

Take for example a card holder who had a high balance of $2,000, but their actual credit limit was $10,000.

Every time they carried a balance near the $2,000 mark, their credit score would be dinged for utilizing too much of their available credit despite the fact that they really had an additional $8,000 of credit available.

The move should improve credit scores for most Capital One card holders, but don’t expect any miracles.

If you have a large mix of seasoned tradelines and credit history, the change probably won’t be very significant.

But if you have limited credit history and tradelines, the change could push your score 50 points higher.

It’s really all dependent upon your unique credit history and profile, but it’s certainly good news for Capital One customers.

Related: How to raise your credit score.

Better Have a Credit Card If You Plan to Rent a Car

If you’re thinking about taking a family trip this summer, or simply need to a rent a car for a business trip, make sure you’ve got a credit card handy.

If you show up to a Hertz or an Avis without a credit card, you could find yourself walking away frustrated on foot

Most, if not all car rental companies require a credit card to serve as collateral if anything were to happen to your rental vehicle.

Put simply, car rental companies require a large deposit because vehicles are expensive and prone to theft, damage, and accidents.

Credit cards are acceptable because they typically have large lines of credit that will cover the extent of any costs associated with your rental, while cash and debit cards may fall short in that department.

Most gold and platinum credit cards also provide some form of insurance for rental cars, though the terms and type of insurance vary by card issuer, and may not cover all vehicles and providers.

Or kick in until your own car insurance limits are exhausted.

You Can Use a Debit Card to Rent a Car, But…

  • Two forms of ID are often required
  • They may run your credit!
  • They place a hold on funds on your debit card
  • These funds aren’t available to you until you return the card

Debit cards (also known as check cards) issued under a VISA or Mastercard logo, which draw funds directly from the cardholder’s account, may be used to qualify for a rental, but prepaid and stored value cards typically are not accepted to qualify for a car rental.

Additionally, debit cards must have the available funds for the amount of the rental charges plus an additional amount to cover any incidental charges in order to secure the rental.

You may have to present a second form of identification as well if you forego a credit card.

If a debit card is acceptable, the car rental company may place a hold on an amount in excess of the estimated rental charges, limiting your ability to use those funds until the car is returned.

The hold may take up to 2 weeks to be released by your bank, creating a huge headache if you need access to those funds during the trip or shortly after.

For example, if they earmark $500 from your debit card for the rental, you won’t be able to touch that money until you return the car and the money is released. This can be a problem if you need that money, or simply don’t have a lot of cash on hand.

Conversely, if you used a credit card they would simply rely on the credit line if something were to go wrong. They’d still place a hold on some amount of the total line, but you’d likely still have access to thousands of dollars, depending on your credit limit.

You Can Reserve with Credit and Pay a Different Way

Keep in mind that debit cards, prepaid credit cards, or stored value cards issued under a VISA or Mastercard logo may be used as a form of payment when you return the vehicle, so you don’t actually have to pay for the rental with a credit card.

It’s just handy to use a credit card for the deposit portion of the deal…

And cash rentals may be accepted with special ID cards issued by the rental companies (Cash Deposit Identification Card), though they may carry additional fees, and typically take several weeks to apply for, so you need to arrange this type of payment well in advance of your rental.

At the end of the day, a credit card is probably the best way to go in terms of convenience, price, and potential benefits like supplementary car insurance coverage.

Tip: You can also earn points on your car rental, perhaps even in a multiple-point earning category like travel!

Credit Line Increases Can Hurt and Help Your Credit Score

While it generally makes sense to raise credit lines periodically to increase your available credit and credit utilization, it can also backfire if you aren’t responsible.

Many credit line increase requests count as hard credit inquiries, which will be documented on your credit report for two years, and count against your credit score for one year.

Though the impact may be minor, a 5-10 point hit could still drop you into a lower credit bracket, costing you on the next loan you take out.  During this time, other creditors may shy away from offering you new or extended credit because of your recent line increase/request.

Think of it this way. If you request a credit line increase, and then a month later decide you want to apply for a new credit card because it offers 0% APR for 15 months, the card issuer may decline your application because of that prior credit limit increase.

The way the card issuer sees it, you just applied for more credit a month ago, and for that reason you’re deemed a higher-risk applicant, at least for the time being.

It’s also possible to be denied when making your credit line increase request – there’s no guarantee it’ll go through.  Additionally, the credit card issuer may ask for income documentation to verify that you actually make what you say you make every year in order to approve the increase.

Don’t Increase Your Outstanding Debt

Assuming your request for a larger credit limit is approved, don’t take it as an invitation to spend more. Sure, you may have made the request so you can put some large purchases on your card temporarily, but be sure to pay them off quickly to avoid an even larger credit hit.

After all, maxing out your credit card can be nearly as bad as a missed payment as far as your credit score is concerned. It also doesn’t make sense to charge up a card that has APR greater than 0% as finance charges will get pricey in a hurry.

Instead of requesting a credit line increase for this purpose, you may want to consider opening a new credit card that offers introductory APR for a certain period of time, such as 12-15 months.  That way you’ll have more credit at your disposal, and you’ll be able to carry a balance without incurring any finance charges.

How a Credit Limit Increase Can Benefit You

While I focused largely on the pitfalls of a credit limit increase, there is the potential to see your credit score increase as a result, it just might take some time.

Let’s assume your existing credit line is $10,000 and your outstanding credit on the card is currently $5,000. This would give you a 50% credit utilization ratio, which is higher than you want it to be.

If you make a request for say a $15,000 credit limit and the card issuer obliges, your credit utilization will improve to roughly 33%, which will give your credit score a boost as time goes on.

This is the case even if your outstanding balance doesn’t change because more available credit will mean your less of a credit risk.  Sure, you’ll want to pay off that balance sooner rather than later, but both FICO and VantageScore consider available credit when calculating your score.  The more available credit you have, the better off you’ll be in their eyes.

Remember, it’s not always necessary to bump up your credit line, especially if you’ve already got a decent percentage of credit available. And never raise your credit lines before or while applying for major loans like mortgages and car loans, as you could jeopardize that financing.

Related: What credit limit can you get?

Balance Transfers and Store Credit Cards

A couple of friends of mine moved into a new house a few years ago, and found themselves with a lot more space and not much to fill it.

Their first instinct was to the upgrade the television. They had placed a 36 inch TV in the living room, but it seemed microscopic in their new digs, so they acted quickly.

Their eyes were clearly larger than their wallet, so they probably thought to themselves, “which store credit cards are easy to get”.

After probably a second of thought, they jumped in the car and went to the nearest Best Buy to upgrade the TV to something a little bit bigger.

The result was a 65 inch rear-projection TV, which happened to be the largest available at the time, in stock at Best Buy.

Of course they didn’t have the $2,000 available to pay for the thing, so they decided to charge it on a Best Buy store credit card.

One of them was able to get approved for the credit card, and the rest of the transaction went smoothly, allowing them to bring home the TV that very same night.

The TV looked great in their new living room, filling up a once vacant space with grandeur and style, and making the two of them very happy.

As time went on they made the minimum payment on the TV, usually over the phone which carried an additional payment. About two years went by when they discovered that they still owed around $2,000, the original purchase price of the TV.

Not only were they making the minimum payment and getting charged when they did, their interest rate was also through the roof, around 20% APR.

So while they thought they were making headway, they had actually done little more than pay the finance charges over about two years.

This is about the same time I caught wind of the situation, and subsequently offered my advice to them.

I mentioned to them that there were 0% APR credit cards out there, and that they could do a balance transfer to one of those credit cards to avoid paying interest for up to 15 months.

They had no idea that such a thing existed, and quickly applied for and received a new credit card, at which point they transferred the balance to the new card.

In less than 12 months, they were able to pay off the television and move on with their lives. They also learned a valuable rule about credit card interest and balance transfers.

If you’re in a similar situation, consider transferring the balance to a low interest rate credit card or better yet, a 0% APR credit card. Otherwise you’re simply throwing away money to unnecessary finance charges and falling victim to credit card debt.

Make Large Purchases Early in Your Billing Cycle

If you generally pay off your entire credit card balance each month, but often have a tough time doing so, you may want to think about timing your credit card purchases.

Credit cards have billing cycles, typically 30 days or roughly one calendar month. All purchases made during a billing cycle are due within a couple of weeks after the billing cycle closing date.

For example, a credit card may have a billing cycle from May 14 to June 14, and any purchases made during that time must be paid by the due date which will be included in your monthly statement, typically 2-3 weeks after the closing date.

If you do not pay the balance in full within the credit card grace period, you will be slapped with a finance charge based on the interest rate and type of APR computation for the remainder that is not paid.

This is where the timing of your purchases comes in handy. Say you have a balance of $1,000 on your credit card, and your closing date is coming up in two days. You also have your eye on that new plasma screen, but it’s another $2,000, and you only have $2,000 available to pay your credit card bill.

At the same time, you know that in a month you’ll have another $2,000 available to pay off your credit card once you receive your next paycheck.

Instead of buying the plasma screen within the next two days, wait until your next billing cycle begins to make the plasma screen purchase. That way the purchase will be deferred to the next billing cycle, and the payment due date will subsequently be pushed back another 45-60 days.

Think of it as stretching your dollar a little, and avoiding costly interest charges, especially if you live month-to-month like so many people do these days.

The only downside to delaying purchases is if there’s a sale or you’re simply too impatient to wait until your billing cycle closes each month. And if the purchase is an emergency or out of necessity.

Note that if you carry a 0% APR credit card, there’s no need to delay purchases as finance charges aren’t issued during the introductory period.

Also consider a balance transfer if you have a lot of debt on a high-APR credit card that simply can’t be paid off in full.