One of the most dangerous aspects of using a credit card is interest. If left mismanaged, credit card interest can cause individuals to fall into a debt cycle, where they are busy paying down these charges instead of their principal balance. There are certain steps consumers can take in order to proactively manage card APR, and make it less of a financial burden.
Pay more than the minimum amount due. Credit card interest compounds and scales with your debt. Therefore, it is best if you do everything possible to cut down your outstanding debt as much as possible. Credit card interest does the most damage when individuals get stuck to paying just the minimum amount due. If you were to make just the minimum payments on an average balance of $15,863, with an APR of 17%, it would take over 27 years to completely pay it off. This is entirely due to how quickly interest charges can inflate the remaining balance, despite efforts to pay it down.
Negotiate a lower interest rate with your bank. Calling the issuer can often lead to a host of benefits, one of which is lowering your card’s APR. Individuals often fall into a trap of thinking they’re locked into the terms of credit they were given at the time of their application. If you’ve been exhibiting good financial behavior and your FICO score has improved, you can call your bank and see if they are willing to lower your interest rates. In some cases, the retention department of a bank is willing to grant such requests. It’s more important to the bank to keep you as a client for the long run, rather than make an incremental profit on an interest charge.
Make sure you never miss a card payment. If you miss too many payments, your issuer can institute a penalty APR. This is a very high interest rate that is applied to all of your future purchases. Usually, penalty APR is in the 27-29% range. Though the practice is slowly decreasing in popularity, many issuers still have the option to raise your interest rates in other ways. Even without a penalty APR, the issuer may raise your interest to the maximum range outlined by your cardmember agreement. Fortunately, you will be given ample warning before this happens. Law requires banks to give customers a 45-day warning before raising interest rates.
If you need to make a big purchase, put it on a low interest credit card. The average credit card interest rate in the United States is around 17%. However, if you apply for low interest credit cards, you can find rates as low as 8%. Furthermore, many of the best low interest credit cards come with 0% introductory APR on purchases for some period of time. If you know you have a big purchase coming up, and you won’t be able to immediately pay it off, it’s worth applying for a low interest credit card. It can potentially save hundreds of dollars.
Use balance transfer credit cards. If you are already trapped in a cycle of credit card debt, and the interest rates are mounting up, consider consolidating your balances onto a single low-interest card. Moving a balance from one card to another is called a balance transfer, and the process usually comes with a 3% fee. Just like low interest credit cards, balance transfer cards come with periods of 0% APR. Some of the best ones can give you as much as 21 interest free months. If you consolidate your credit card debt onto one of these cards, the interest savings will usually make the 3% transaction fee insignificant.