A lot of people pay way too much interest on their credit cards. Although this applies to everyone, it creates a serious problem for individuals who have little to no credit. It also poses a risk to those with poor credit. While the goal is to use credit cards to become financially established, all cardholders can lower credit card interest simply by knowing how.
For instance, say you went through a tough financial period. As a result, your credit rating dropped substantially, putting you in the “poor” or “fair” category. That makes it hard to get a credit card. However, if you find a company willing to issue one, you can anticipate paying interest anywhere from 20 percent to 30 percent or sometimes even higher.
Here’s the problem. If you charge $1,000 on the card but only pay the minimum amount due each month, it’ll take you years to pay off the debt. The reason is that a chunk of your money goes toward interest rather than the principal amount. If you’re not careful, you could end up in a worse financial situation than before.
Ways to Lower Credit Card Interest
So, what can you do to lower credit card interest? Fortunately, you have several viable options. The following are five of those worth consideration.
1. Ask to Have the Interest Lowered
Typically, this only works after you’ve had a card for a while and if you’ve made every payment on time. However, once you’ve established yourself as a responsible customer, the card provider won’t want to lose your business.
So, you can call the company and ask if they’ll lower your credit card interest. If they say no the first time, wait a few months and then try again. Surprisingly, getting a lower rate is often this easy.
2. Pay Off the Balance Each Month
To lower your credit card interest, pay off the outstanding balance each month. So, if you charged $200 to your card, rather than paying the minimum of $25, pay the full $200. If you can’t do that, at least double the minimum amount due.
Why does this matter? Consider this scenario. You have a credit card with a 16 percent interest rate on a balance of $5,000. The minimum monthly payment is $25, which equals 2.5% of what you owe.
Paying only the minimum amount due each month means it would take you 16.25 years to bring the balance to zero. Even worse, along with the $5,000 you initially owed, during that period, you would pay an additional $5,010.05 in interest. Think about that: a $5,000 debt just more than doubled to $10,010.05.
3. Transfer the Balance
You can transfer the balance to a different credit card. However, don’t do this with just any credit card; choose one with an introductory period of low or zero percent interest. The card provider gives cardholders a set amount of time to enjoy this perk. That’s when you can move the balance of a high-interest card to the new one. While you’ll still owe the money, you won’t pay nearly as much in interest.
Not only will this lower your credit card interest, but this is also an excellent opportunity to pay your balance off completely. During the time you have little to no interest, focus on getting the transferred balance paid as soon as possible.
One another note: Make sure that after the introductory period the interest doesn’t skyrocket. Unfortunately, some card providers reel people in with the low to no interest offer only to lock them into an even higher rate than what they were paying on the old card. So, you have to be careful with this.
4. Pay the Credit Card Off with a Personal Loan
Especially if you’ve been with one particular bank or credit union for a long time, you’ll find it relatively easy to secure a personal loan. In almost every case, the interest on the loan will be far less than the interest on the credit card. In some instances, using a personal loan to pay off a portion of a credit card balance makes sense.
Another way to lower interest on a credit card is to get a consolidation loan. With that, a bank or credit union rolls all your debt into a single loan. Along with getting out from under a financial burden, you’ll likely have lower monthly payments and longer to pay off the debt yet still be able to build your credit.
5. Pay the Balance on the Right Card
If you have several cards, choose the one with the highest interest rate and lowest balance to pay off first. You might think it would work the other way: paying the one with the biggest balance. However, by getting the one with less money owed out of the way, you’ll feel motivated to move on to the next card.
Organize your credit cards by interest rate and then balance. Say you have three cards, each with 22 percent interest. One has a balance of $3,000, another $2,100, and a third $750. Tackle the $750 card as a priority, then move to the one with a $2,100 balance and finally, the $3,000 card.
The Bottom Line
Just because you have one or more cards with high interest doesn’t mean you’re stuck. To achieve financial freedom, consider all of these helpful tips. In some cases, it takes a little bit of time and effort to lower credit card interest. However, addressing the problem the right way will help you succeed.