Strategies to Reduce Interest Rates

Reasons behind higher interest rates

Finance charges represent the bulk of your minimum credit card payment. Depending on the interest rate you are assigned, this can really increase the amount of your minimum payment. Most minimum balance calculations were changed as of the first of 2006 to accommodate new federal guidelines (see Higher Minimum Payments Squeeze Consumers).

Variable rates tend to be based on the prime rate, which fluctuates over time. Fixed rates will not change until your credit card providers find a reason to change these. The creditor's right to change your interest rate is buried within the terms and conditions of your credit card account. Your creditor may increase your interest rate if you fail to make the minimum payment on-time, exceed your credit limit on that account or make only the minimum payment on the account month after month (known as slow pay). Furthermore, most credit card accounts also include a Universal Default clause. This gives card issuers the right to increase your rate even if you have maintained a solid payment on that account. If they notice late payments or other negative marks on your other credit accounts, they may raise your rate as an indication of increased financial risk. This is true even when your other accounts are with different creditors.

Steps to getting lower interest rates

Once your interest rates have gone up, you will likely have to show signs of financial strength before you can achieve rate reductions. There is one exception to this rule. Many card issuers allow you to protest changes to your account. If you contact your creditor and inform them that you do not accept the changes to your account, then you can have the old rules extended until you pay the account off in full. In exchange for this, you will likely lose the right to use the card when the balance is paid in full or when the card expires. This option normally applies to variable rate increases and may not always be an option under rate increases due to default. This is an attractive option when the rate jumps dramatically on a card you rarely or never use.

Step 1: Establish current payment status

All credit card accounts need to be brought to a current status. There should be no account incurring late fees. If you are behind, concentrate on getting those accounts returned to a current status by making higher payments. If you have to, split the amount across 2 months so that it fits within your budget (be sure to anticipate additional $25-39 late fee). If you are over the credit limit, you must bring the account below the stated limit. The bottom line is you must get everything current again if you want to pursue lower interest rates, plus you will save more by avoiding late and over-the-limit fees. If you cannot bring accounts current on your own, consider credit counseling to eliminate credit card debt.

Step 2: Begin making higher payments

When all accounts are current, you will now try to show a stronger financial status by making accelerated payments. Most of the financial columnists advise making a higher payment to the account with the highest interest rate while making minimum payments on all other credit accounts. If you do this, your risk being labeled a "slow pay" on the other accounts, which can increase your interest rates on those accounts.

Instead, a similar approach is recommended. It is true you want to send higher payments to the card with the highest interest rate (more on this in step 3). However, you must also send at least $5-10 above the minimum payment on all other accounts. Some creditors will automatically raise your interest rate if you make only the minimum payment for each of the previous six months. If money is tight, it is OK to stick with the minimum payment on the other accounts, but make sure to send an extra $10 to each one of them periodically so that no account receives only the minimum payment for more than four months.

Step 3: Build your case

Focus on the one account with the highest rate and continue to make much higher payments to that account. The more you send above and beyond the minimum payment, the greater justification you will have for requesting a lower rate. If you have had a pretty good payment history, you will want to follow this step for three to four months. If your payment history has been poor, you should continue for six months.

Step 4: Make the request

Once you have shown financial strength by making regular increased payments, call your credit card company. You are ready to negotiate a better interest rate. Gather all of the credit card solicitations you have received recently. You will likely notice better terms on the newer ones as your credit situation has improved. Call the customer service number for your creditor and request a lower interest rate. Let them know that you are serious about paying the account balance down, and that you are receiving much more attractive terms from other providers. Quote the better rates that you have received. Creditors will frequently offer a lower rate if they believe that you will take your business elsewhere. Be polite and inform them that you are prepared to transfer the balance unless they give you a proper rate reduction.

Most reductions that are granted are 2 to 4 percentage points. Ask for them to match the lowest permanent transfer rate that you have been offered (do not quote promotional rates unless the term is at least eight months). Usually, a compromise can be reached somewhere in between.

Sometimes a creditor may call your bluff. If you do not get an acceptable rate reduction and are prepared to transfer the balance to a lower rate card, make sure there are no balance transfer fees. Also, evaluate the term of the lower rate to make sure it does not go up again within the next several months (avoid temporary promotions). If you are disciplined enough to play the balance transfer game, then you can save significant money in the long run (credit card issuers refer to these people as "gamers"). However, there are some risks with this technique and your credit score will normally increase faster if you avoid balance transfers.

Step 5: Repeat the cycle

If the card you have been focusing on still has a higher interest rate than the others, you will wish to continue paying down that account at a faster rate. If another account now has the higher rate, it is normally better to begin focusing on that account at this time. Whichever account you use, it is important to continue making a much higher payment toward that account so that you will be in position to request an interest rate reduction in a few months. Again, be sure to pay a few more dollars than the minimum on all other accounts to avoid slow pay classification.

Stay the course

Paying off credit card debt can take time and dedication. You likely did not get into debt overnight, and it will take some time to get out of debt. The key is to be diligent with your principal payments and avoid using the accounts whenever possible. A lower rate will reduce your minimum payments. Remember that higher principal payments are what reduces your debt faster. If you find that you are unable to follow this strategy, then you may wish to contact a credit counselor to find alternative options to eliminate credit card debt.

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