The interest rates charged on credit card balances and other debts can contribute to the amount of debt you have. Learn how to lower your interest rates using balance transfers, debt consolidation and a strategy for paying off debt.
Know the Difference between Interest Rates and APR
When you take out a loan or carry a balance on a credit card, the lender charges interest. This is a stated percentage of the balance you owe calculated on an annual (yearly) basis. You may notice a box on your credit card or loan statement that refers to APR, which stands for annual percentage rate. To get a true picture of what debt costs, pay attention to the APR. It includes the interest rate, loan fees, annual fees, late fees and over limit fees. It's common for the APR rate to be much higher than the interest rate alone.
Using Balance Transfers to Lower Credit Card Interest
The best way to control interest charges is to pay off your balances in full during each billing cycle. If that's not possible, you may be able to reduce credit card interest rates by comparing the interest rates on your credit cards and transferring balances from high interest rate cards to a card with a substantially lower rate. Credit card companies encourage balance transfers, as it's a great way of taking business away from a competitor.
Although balance transfers are promoted as an easy and fast way to save on interest, there may be additional fees included. Remember the APR? Read the fine print carefully to fully determine what a balance transfer can cost. If it adds several percentage points to the APR, it may not be worthwhile.
Debt Consolidation Loans
If you have good to excellent credit--and want to clean up several credit card balances--ask your financial institution about a debt consolidation loan. They may offer a lower interest rate installment loan for enough to pay off high interest rate (and higher APR) credit card balances. Banks are careful about making unsecured personal loans. It can be tough to qualify if you have less than pristine credit.
If you own a home, you've probably heard about refinancing your mortgage or taking out a home equity line of credit to pay off high cost debt. This method of managing debt was very popular in times when home values were rapidly increasing; it can be a risky proposition now that real estate values are falling in many areas.
Mortgage lenders typically require a minimum of 20% home equity including your refinanced mortgage amount or the combined amounts of your mortgage and home equity line. If your house is worth $200,000--and you owe $150,000--you could carry up to $160,000 in home loan debt and still have 20% equity. This simplified example does not include lender fees and costs, but it does illustrate that you could possibly borrow about $10,000 to pay off high interest rate debt.
Remember to compare APR's and not only interest rates when deciding if a home loan is the right debt consolidation option. Adding credit card debt amounts to your mortgage can consolidate several payments into one, and it may lower your monthly payment amounts. However, that may ultimately cost more if you repay your home loan(s) over many years.
Asking for Lower Interest Rates
If you have a good payment record with your creditors, you can try asking them if they'll lower your rates. They would prefer to keep your business, and they may be willing to lower your interest rates if you've paid on time and haven't maxed out your credit limit.
Prioritizing Debt Payments
Establish a system for paying down debt. Always pay the most you can afford toward the account with the highest APR. It can be difficult, but using any extra money such as tax refunds or bonuses to pay off debt can help you save on finance charges.
Too Deep in Debt? Get Help in Reducing Interest Rates
If you're struggling with high credit card balances and can no longer meet minimum payments, your credit card companies may raise your interest rates. This is how credit card debt can become unmanageable. Seek help from a credit counseling agency; it may be able to develop a repayment plan that includes reduced interest rates and waivers of late fees.
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