My Credit Card Rate Is Too High!

Credit cards have
become a staple of everyday life. In the United States today, 640 million
credit cards are in circulation. That’s two credit cards
for every man, woman, and child. The average American adult has four credit
cards, an increase from 3.2 cards in 2004. Based upon Federal Reserve figures,
total U.S. credit card balnces are $800 billion. On average, 40% of Americans
pay their credit card bill each month. This means that around 60% carry a
credit card balance.

Customers pay for the
convenience of carrying a balance. The Annual Percentage Rate (APR) is the
principal means of comparing credit card rates. APRs on credit cards average
14.41% for cards with rewards and can go as high as 36%. There is no federal
limit on the interest rate a credit card company can charge.

How do lenders
calculate finance charges? Finance charges are calculated by applying a
Periodic Interest Rate to the outstanding balance of the credit card account.
The trick is how to calculate the balance, which changes every time a customer
makes a purchase or sends in a payment. Credit card companies use several
methods to determine the balance on an account. The simplest method is to use the balance at the end of each month. With this method, the periodic interest rate is calculated
by dividing the annual percentage rate (APR) by twelve. An APR of 21% would convert to a
periodic rate of 1.75% (21% divided by 12 months = 1.75%) per monthly billing period.

The periodic interest
rate is then multiplied by the balance to determine the dollar amount of the
finance charge. Say a customer has a balance of $2,500 at the end of the month
on a card with an APR of 21%. If the credit card company used a simple end-of-month
calculation the interest charge would be $2,500 x 1.75% = $43.75.

This means that aside
from other charges and fees, the customer will pay the card company $43.75 for
the privilege of borrowing $2,500 for one month.

How can you lower
your interest rate? The best way is to be a good credit risk. Credit card
companies have recently begun to calculate a customer’s interest rates not only
on the customer’s track record with the company, but also the customer’s
overall credit rating. Even if you make your credit card payments on time, the
credit card company can raise your interest rate if you’re late on payments
elsewhere. If you are late with another credit card company or even with your
phone, car, or house payment, the bank can raise your rate. This practice is
called the “universal default” clause, and it’s becoming a standard
clause in credit card contracts.

Your credit
score–known as a FICO score–is critical to determining how much you can
borrow. It is a major factor in determining the interest rate you pay on a
credit card.

Your credit card
company can also hit you with expensive fees. In 1996, the U.S. Supreme Court
in Smiley vs. Citibank lifted restrictions on late penalty fees. Consequently,
there is no limit on the amount a credit card company can charge a cardholder
for being even an hour late with a payment. This is one reason why it pays to
read the fine print on your credit card agreement.

Be proactive! Call
your credit card company and ask for a lower rate. You may get one–but if you don’t, pay off the card as soon as possible and keep your balance low. But don’t close the card account, because having a paid-up credit card will improve your credit rating.