If you have credit card debt and you’re ready to start paying it off, then you are probably thinking about how to make your repayment more efficient. There are two variables in the equation that make your debt expensive: principal and interest. Principal is the amount you have charged to the card, and you cannot do much about that now (unless you return purchases and get refunded). Generally, you are stuck repaying the principal in full.
Interest, on the other hand, grows over time even if you don’t make future purchases. However, you can lower your interest expenses. You can minimize interest by paying down your principal. And, you can lower the interest rates on your credit cards, which will lower your interest costs over time.
Why this Matters
The primary reason for lowering your interest rate is to save money! This is especially helpful if you have debts on multiple cards and are trying to dig yourself out. Every bit of savings helps. Here is a quick example of how much you could save by lowering your interest rate.
Imagine you have a $10,000 balance on a credit card that charges 18 percent APR and has a minimum payment of $250. The NFCC credit card payment calculator shows that this account would cost you $5386.23 in interest before the account is paid off.
If you lower the interest rate to 12 percent instead of 18 percent, and make the $250 monthly payment, then you would only pay $2834.67 in interest expenses. That one small change of lowering your interest rate would save you $2,551.56!
Sounds like a good strategy, right? Here are some ways you can get lower interest rates.
Open a New Card
One way to get lower interest rates is to switch to a different card. You could open a card with a lower rate than any of your current cards. Then, any new debt you acquire on the new card would be cheaper than on your previous cards. However, this won’t really help you pay down your debt; it will just make your future debt less expensive.
Another option using a new card is to do a balance transfer, which is a form of consolidation or refinancing. Many people use this strategy to move their current debt from high-interest cards to a new low-interest card. This certainly can work, but there are a few issues and caveats to watch out for. We have summarized these before, but they boil down to the following:
- A balance transfer involves fees that may be prohibitive for some people.
- For this approach to make sense, you probably need to have a good to excellent credit score in order to get a low interest rate.
- The low interest rate on a new balance transfer card is generally just for a promotional period, and once that period expires the rate is very high.
- This approach does nothing to help you work on underlying financial habits and behaviors.
If you choose to go this route, make sure you understand the best consolidation strategies and the impact on your credit score.
Negotiate a Lower Rate
Another option to lower your interest rate is to negotiate the rate with your creditor. Even though the interest rate calculation for your card is spelled out in your cardholder agreement, a lower rate may be just a phone call away. You could contact your creditor and directly ask for a lower interest rate. Is it really that easy? The answer is maybe.
A 2018 article from CNBC reported survey results from consumers who made various requests of their creditors. While many respondents were successful in receiving higher credit limits and waived late fees, only 56 percent were awarded lower interest rates when they asked. Therefore, this is far from a guarantee.
What will help is having a tangible reason for requesting the change. Just saying that you want to optimize your debt repayment may not be enough to cut it. Instead, citing a specific hardship and asking for a lower rate as part of a “hardship program” might yield better results. If your hardship is due to the COVID-19 pandemic, creditors may be even more willing to work with you. The CFPB has published a list of credit card relief programs that creditors are offering in response to the coronavirus. That list includes reduced interest rates.
If you are not able to reference a specific hardship, you could try a different tactic—leveraging your role as a loyal customer. Try telling your creditor that you are considering a balance transfer or another financial product with a much lower interest rate. Your creditor may lower your rate in order to keep your business.
Use a Debt Management Plan
Negotiating interest rates on your own is difficult, time consuming, and a roll of the dice. Luckily, one of the best features of a Debt Management Plan (DMP) is that the interest rates are reduced for most debts on the plan. Because the agency has a preexisting relationship with creditors, and because your creditors will know you are participating in a structured plan, this is much easier and more likely to succeed.
Choosing this option will bypass some of the headache and frustration of negotiating on your own. But, it’s probably best for consumers with multiple debts. If you only have one pesky card, negotiating on your own may be better.
Compared to a balance transfer or other consolidation option, a DMP has some advantages, too. In a DMP you work with a counselor who leads you step by step through the process. And, there is a financial education component, which will help you manage your money better and achieve your goals in the future. You won’t find that sort of personalized assistance with other options. That is not to say that consolidation is not helpful for some people. If you have great credit (in order to avoid fees and get the best interest rates) then something like a balance transfer may be a smart move, especially if your total debt balance is relatively low.
However, if you have multiple debts and your credit score is not in great shape, then a DMP may be the best option to get lower interest rates on your cards, along with other benefits.
Want Help Deciding?
If you have high-interest debt, make a plan to pay it off. It may be difficult to choose which path forward is best, but you don’t have to make that decision alone. An NFCC-certified credit counselor can review your credit and overall financial situation and help you make a plan.