Credit cards are a useful tool to help you stretch your dollars when some months are a little too tight. Additionally, credit cards can help you earn points and rewards for things like travel, hotel and accommodations, and even household items you want. However, these popular incentives tend to lure in individuals who eventually get into trouble because of high-interest rates.
According to CreditCards.com, from December 2015 to 2019 The Federal Reserve has raised its benchmark rate nine times in 0.25% increments. With rising interest rates, Americans can expect to pay an additional $2.4 billion in interest payments annually. This number is on top of the current amount credit card holders already carry which totals to about $1 trillion in credit card debt collectively according to the Federal Reserve.
With this in mind, get serious about learning the language of your credit card agreements and your exact interest rate. Even if you don’t carry a staggering amount of credit card debt, you should know what it will cost you over the long term.
Why Pay Attention to Interest Rates?
According to Discover, your interest rate percent (%) is divided by 365 days to determine your daily interest rate. This is the amount of interest you earn on your carried balances compounded over the course of one billing period. You’re probably already aware that having a higher interest rate means it’s going to take longer to pay off your credit card debt and cost you more. But just how much more are we talking?
A $5,000 purchase with a 15% interest rate, over one pay period, leaves you with $200 in interest fees and a grand total of $5,200.
But an extra $200 dollars doesn’t sound that crazy, does it? However, according to CreditCards.com, the credit card interest rates currently average at 17.68%. With this interest rate and a minimum monthly payment of 4% of the $5,000 total–$200 a month–you’ll see a $0 dollar balance in about 11 years. Over those 11 years, you will have paid $2,793.09 in interest payments. Now that will make you raise your eyebrows!
What can you do to help alleviate the pressure of compounding interests and high-interest rates?
How to Use Information About Interest Rates
Many people don’t know their exact credit card interest rate. You can find this information on your banking or credit lender’s website or in your monthly statement. You may or may not be surprised to learn that your interest rate is much higher than the example rate we gave. What can you do about high rates?
The experts are Credit Karma suggests haggling your interest rate with your lender. In order to succeed you’ll need three things:
- A good credit score
- 30% or less utilization of the total balance
- A six-month history of on-time payments
Your credit card lender is more likely to work with if you can prove good faith. This means that you have paid your bill on time, if only the monthly minimum, for at least six months. (You can calculate what your monthly minimum payment and length of time to pay off your balance using the calculators on our Resources page.)
Other factors may come into play when asking your lender for a lower interest rate. For starters, be polite! Remind them of your long-time customer status. One option is to ask for a balance transfer to a 1-year 0% APR card. You may be subject to a balance transfer fee, however, a $50 transfer fee can mean the difference between you paying off your balance comfortably within a year or struggling and carrying a high balance for over a decade.
Even the smartest people struggle with figuring out the lingo and terms of credit card companies. However, the more you know, the better equipped you are to take control of your debt.
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