Learning how to reduce the APR on your credit cards is something that could save you a lot of money in interest payments down the road. This is especially true if you’re someone whose credit rating and history dictate a higher interest rate. Those higher rates could be as much as 5% greater than what those with good credit pay.
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To give you an example of how important this is, consider how much you would save in interest by lowering your APR from 12% to 10%, based on a $5,000 balance. If you carried that balance for the course of one year, at 12%, you would pay $60 in finance charges. At 10% your finance charges are reduced to $50. Over the course of 20 years of credit card use that would result in a $2,000 savings.
Understanding Annual Percentage Rates (APRs)
According to the Consumer Financial Protection Bureau, APR is an acronym that stands for annual percentage rate. It refers to the amount of money the credit card company will charge you in interest over the course of a full year. The most common method to calculate credit card interest charges is to divide the APR by 12, then multiply the result by the outstanding balance at the end of the month.
Before you can reduce your APR you must first understand what it is and how it works.
APRs are typically established by credit card companies by starting with a minimum amount of interest they want to earn and adding to that whatever the current Prime Rate is. The Federal Reserve Bank of San Francisco defines the prime rate as the standard amount of interest banks charge for commercial loans.
That minimum APR is then offered to customers with the best credit scores. As your credit score goes down, your APR will go up. Furthermore, many credit card companies will charge a higher APR for credit card cash advances, charges that exceed a predetermined credit limit, and foreign transactions. These higher APRs are put in place to cover the extra expenses involved in such transactions.
If you’re paying a higher APR because your credit score is not so good, you can begin the process of reducing them if you improve your credit score. In other words, the credit card company may have offered you an introductory rate of 9.99% had you shown a good credit score of 750 or better. The best way to get your APR reduced to that better rate is to improve your 650 credit score by 100 points.
You can do that through several means, not the least of which is paying all of your bills on time and not accruing any further debt. Furthermore, while you’re getting help to rebuild credit it’s a good idea not to try to establish any more. That means stay away from new credit card applications, car loans, and the like. Every time you try to acquire more credit it reflects on your credit score.
Once you improve your credit score significantly, you can then simply call your credit card company and request a reduced rate. Be sure to be armed with the information about your improve credit score so that the representative is aware you know what you’re talking about. You might even invite them to check your credit themselves to verify your claims.
Reducing Your APRs with Good Credit
Even with good credit, you can reduce your APRs by contacting card issuers and requesting it. This may sound unreasonable, but countless sources have verified it is entirely possible and more common than you think. Bankrate.com and the Wall Street Journal’s SmartMoney are just two examples.
Experts recommend that when calling your credit card company you should follow a couple of important tips. First, be polite but firm in your requests. Second, be sure you understand APRs and how the system works so that you can speak with confidence. Third, be prepared to switch to a new credit card company if your current one refuses to honor your request.
If you are firm, confident, and have a convincing manner about you, it is quite possible for you to reduce your APRs with a simple phone call.
Sometimes you have to talk with representatives who have higher authority, but so be it. Just continue insisting on speaking to someone of higher authority until you reach someone who can reduce your rate for you.
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