By Maryam Farooq on March 23, 2011
.jpg.aspx?width=75&height=75) The thought of paying interest on your credit card may be disconcerting, but there is a silver lining. There are simple, effective ways in which you can lower your own interest rate. Though a simplified understanding of how credit companies operate, minimizing interest rate costs is possible ON YOUR OWN. Yes, with no help from outside companies, you can! Say it with me now, “I can lower my own credit card interest!”
No one enjoys paying credit card interest. It’s difficult enough staying on top of your existing payments, is it really necessary for these additional fees to accrue? Unfortunately, yes. Collecting on interest rates is necessary for banks, as it compensates the lender for the risk of principal loss (also known as the credit risk) and the opportunity cost of lending to you, the borrower. The ‘opportunity cost’ of a resource is the next-highest-valued alternative use of that resource1; in the case of banks, it is how else the bank could have lent out the money it instead decided to lend to you as credit.
So while the task of paying interest often seems cruel and burdensome, it is imperative for banks (and the greater economy) to function. And by understanding the foundation of how interest is conceptualized, we can gain insight on how to mitigate the cost for us, the borrowers.
Interest rates on credit cards are referred to as the APR, or the annual percentage rate. Many consumers take this rate as fixed and as given, but this is simply not true. The APR you currently pay on your credit card has been tailored to you, and calculated by a number of different methods encompassing a variety of guidelines specific to your creditor. While the current rate you pay may feel ironclad due to general lack of understanding of the convoluted methods used to calculate it, know that there is always room for adjustment.
A temporary, quick fix solution to lower your payments from credit card interest is to transfer the balances of your cards to either low or 0% APR credit cards. You have undoubtedly seen or have been presented by creditors offering these promotions of low or 0% APR credit cards, and this can be capitalized on. These promotions are often time restricted (usually 9-12 months), and there will most likely be a transfer fee to move your balances on to the new credit cards; but the long-run gain of paying low to no APR for 9-12 months will surely and momentously outweigh the initial transfer fees required to make this happen.
Other solutions include taking advantage of the relationship you have with your creditor. The longer you have been a customer of your credit agency, the easier it should be to facilitate these next steps:
1) Eliminate your card’s annual fee. An annual fee on your credit card indicates that you are being charged a yearly fee just to have that card. When the annual fee is higher than the yearly amount you pay for interest on your card, you have just reason to ask your creditor to eliminate the annual fee completely.
2) Lower your interest rate through direct negotiation. Through negotiation, you can contact your creditor directly and mediate a payment plan with a representative of that credit card company. This is where doing business with that company for several years or more will come into play. The longer you are with a company, the longer they have been issuing you credit, and the more they will want to protect themselves from a possible loss. If you threaten bankruptcy, the company will usually respond by renegotiation of your interest rates in order to help you pay off your debt and ultimately keep your business.
a. It is preferred that you, the consumer, contact your creditor directly rather than employing the services of a debt-negotiation firm. Aside from the administrative fees they will charge you, there is also always possible risk associated with exogenous firms. Not all credit card companies work with these debt-negotiation firms, and some can even inadvertently impact your credit report negatively.
Important tactics that will help you when you ask for a lower rate is to prove financial responsibility and strength. One can do this by making monthly payments on time, showing trustworthiness through a pattern of timely payments, and by paying a few of the monthly payments over the minimum, showing financial health and subsequently improving your credit score.
In order to get your debt-negotiation started, simply call your credit card company directly to speak with a representative, or if you’d rather, email/mail your credit card company. Debtors Unite offers some very helpful templates; a request for a lower interest rate is available.
Source
1 http://www.econlib.org/library/Enc/OpportunityCost.html |