Mastering Money

How to Lower Your Credit Card Interest Rate

Since June, 2004 the Federal Reserve has been increasing interest rates which has been a windfall for credit card companies and a hardship for consumers who keep balances on their credit cards.  The average American adult carries three bank credit cards.  Most issuers prefer we use variable-rate cards, which carry an average rate of 16.6% as of December, 2006, which is up from 12.5% from December, 2004.  The Government Accountability Office found that 11% of U.S. cardholders incurred interest rates of at least 25% in 2005, compared with only 5% in 2003.

Along with the increase in interest rates, there has been an increase in competition among credit card issuers.  As in most industries, it's much easier to hold on to current customers than to attract new ones; this is also true for the credit card industry.  They want your interest payments, so they are willing to relinquish some revenue so they can at least have a part of it.  It's far better to have some than none at all.

My theory, and it works in this case, is that it doesn't hurt to ask.  All they can do is say "No," in which case you can simply transfer your balance to a card that is offering 0% interest.  Keep in mind this great rate won't last forever.

Bank of America cardholders who call asking for a lower rate are transferred to a "retention specialist."  The key word here is retention.  These "retention specialists" are trained in what the bank calls "judgmental lending," which allows them to consider much more than payment records.  In an article in The Wall Street Journal dated January 9, 2007, success in lowering rates varies on factors ranging from payment history to balance size.  Since balances are what generate the income in the form of interest to the credit card company, someone who carries a balance from month to month is more likely to have their rate lowered.  However, I don't advocate carrying a balance from month to month; interest payments are only making life more expensive for you.

If you are in the situation where you'd like to have your rate lowered, here's a suggested script to follow according to the U.S. Public Interest Research Group:

First of all, be polite and don't lose your temper.  Say, "Hi.  My name is __________.  I am a good customer, but I have received several offers in the mail from other credit card companies with lower APR's.  I want a lower rate on my card, or I will cancel my card and switch companies."

Good luck.  All they can do is say "No."

Credit Card Caveats

I'm not one of those money guys who hates credit cards.  I think they're a good thing, as a matter of fact, I have two of them.  One is a MasterCard that gives me miles for every dollar I spend, and the other is a Neiman's card, because my late mother always told me every man should have one.  My late mother was late in more ways than one...she never wore a watch...

You see, used wisely, a credit card saves you from writing a bunch of checks all over town and avoids carrying a lot of cash.  However, studies do show that you will spend 20% less if you use cash.  Why?  My thoughts are that when you hand a salesperson your credit card, they swipe it, then give it back to you.  Psychologically, you haven't given anything up; whereas with cash, you're now deprived of spending that money...forever.

My philosophy that I try and engender into young folks as well as "mature" people is that it's okay to make purchases with a credit card, as long as you have the money in the bank to pay for the charge.  That being said, there are some things to look out for when using a credit card:

1. Late fees.  Did you know the credit card industry made $13 Billion last year on late fees alone?  Folks, we're not talking interest charges, just late fees.  If your payment is as little as five minutes late, you get zapped with a late fee.  The best way to avoid late fees, of course is to pay on time.  Make sure your check is legible, write the amount paid in the box on the stub, write the last four digits of you account number on the check in case it gets separated from the stub, and always send in the stub.  If you call your credit card company, they may take the late fee off, if you ask them nicely.
2. The roaming PO Box.  Another reason to make sure you're using the stub that comes with your bill.  The credit card company wants to take full advantage of your cash, so they may change the PO Box where you mail your payments so they can get to your cash faster.
3. Disappearing rewards.  Aren't rewards great???  Because we're using our credit cards in places like supermarkets and gas stations, credit card companies have started to pare down their offers.  As a matter of fact, American Express eliminated double points for everyday purchases.
4. Disappearing low rates. This is part of the old bait-and-switch.  Credit card companies will entice you with low rates, and then when you have a ton charged on the card, they increase your rate.  This includes the fixed rate that isn't.  We all prefer to pay a fixed rate, but sometimes when you think you have a fixed rate, the credit card company changes it to a rate that varies with something you've never heard of, such as the Ukrainian prime rate.
5. Rate increase for no reason.  The credit card company is only liable to give you 15 days notice when they raise your rate.  That's it...they don't even have to give you a reason for it.
6. Pay by wave.  VERY DANGEROUS!!!  With technology advancing the way it is, you can actually wave your card in front of the scanner as opposed to swiping it.  This simply makes purchases that much easier.  When something is easier to accomplish, you'll do more of it!
7. Fees on cash advances.  First of all, the rate on a cash advance from your credit card is higher than the rate for purchases, and you will pay that higher rate until you pay your card off in TOTAL!!  Yes, the credit card company assumes the LAST thing you pay off is that cash advance, so you'll always be paying the higher rate until the entire balance is paid.  If you have money in your checking account, and you have an ATM card, get cash that way.
8. Rate increase on how you pay your other creditors. Yep, you guessed it; if you pay your electricity company late, the credit card companies will know about it, and guess what?  You're now a greater risk.  Guess what that means?  YOU PAY HIGHER RATES!!!!
9. Getting your kids addicted. Bad idea anyway, to let your kids get a card.  There are new products, Visa's UpSide Card and MasterCard's Allow Card will tell you they teach your kids about money...beware!  Actually, these aren't credit cards at all, but prepaid cards.  What you need to look out for are the fees:  the Allow Card has a $20 activation fee, along with a $3.50 monthly maintenance fee, and oh yeah, reload fees (when the card gets low, it needs to be filled up, just like the gas tank in your car) that range from 75 cents if you use your checking account to as much as $50 if you use your credit card.
10. Setting low minimum payments.  The average American has $10,000 on their credit card.  Did you know how long it would take to pay off a credit card if you had a $10,000 balance, made no other purchases, and paid just the minimum?  34 YEARS!!!
11. Balance transfer fees.  When you receive those great offers in the mail for a zero interest rate card, you may be over anxious to transfer the balance from your 24% card to the new one.  Just beware the new card is paying off your old balance for you and they will consider that a favor to you.  Guess what?  Just like when you were growing up, there was no such thing as a free favor.  Some cards may even charge a balance transfer fee that's a percentage of the balance transferred, which can indeed be costly.  Also note that if the balance isn't paid off by a certain amount of time, you may owe interest retroactively.
12. Charges that aren't yours.  Yes, you guess it!  Make sure you audit your credit card statement when it comes.  You may be paying for someone else's clothes!!  Tell the credit card company the charge isn't yours; they'll investigate, and if it truly isn't they'll remove the charge.

Again, credit cards aren't a bad thing as long as they're used properly.  Just make sure you're aware of all the "hidden costs."