Interest rates on credit cards are so high for a variety of reasons. Despite the fact that interest rates in general are at an all time low, credit card interest rates are very high. This is because credit card issuers rely on revenue from interest in order to make money.
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Credit card companies charge such high rates in order to help absorb some of the losses that they have had in other areas, since the economy tanked. In addition, they have had a number of cardholders default on their credit card debt, which means the company needs to regroup the loss elsewhere.
Securitization plays a major role in the interest rates that are charged for credit cards. Essentially, in order to minimize the risk they are taking on with credit cards, the debt is sold in bulk to investors. This helps defray the cost and remove the risk that otherwise the bank would have. In turn, banks raise interest rates and fees in order to still make money from the debts.
Some other theories about high interest rates have also been proposed. Because they are cutting annual fees in order to stay competitive, their best area in which to make money is with interest rates. Because the banks anticipate the next casualty of the economy as the credit card industry, those in the industry decided to move themselves.
How can I eliminate paying interest on my credit card?
It is very easy to stop paying interest on your credit card. You just need to make a point to pay them off entirely at the end of every month. When you do not carry a balance on a credit card, the issuer cannot charge you interest. However for people that are already carrying a balance that may prove challenging.
What this means is that you need to focus on eliminating any existing credit card debt and then commit to not spending more than you can afford to pay off every month. This takes discipline and budgeting if you want to keep from lining the pockets of the credit card issuers. For help with budgeting, check out SmartMoney’s section on debt-management.
If you are already in debt, consider a credit card that has a 0% APR introductory offer, in order to help you get the credit card debt under control.
Attempt to pay off that debt within the time limit of the introductory offer, so you can continue to be charged no interest after the period ends.
What else should I look for?
You are aware of the importance of seeking out a credit card with the lowest possible interest rate. In fact, this is one of the single most important things you can look for in a credit card in order to save money. In addition, you should also look for a card with reasonable fees.
A no annual fee card is highly recommended, but be sure to look out for other fees that could become hefty charges.
You should also carefully look at the different types of rewards credit cards offered. Not all rewards plans are equal. Take the time to evaluate the rewards plans and whether the options would be worthwhile and enticing for you. Choose one that suits your lifestyle and one in which you can accumulate points easily.
How can I check out a credit card issuer?
Checking out a credit card issuer prior to getting a new card is a very good idea. Essentially, you have to just do an internet search. Search for reviews and complaints about the company you are considering using. In no time, you will have a variety of different comments from actual cardholders. Sites like the Better Business Bureau are other good options for such information.
Understanding what makes interest rates so high on credit cards does nothing to make it any easier to accept as a consumer. Doing the research to make sure you have chosen the best possible credit card with the most reasonable rates before you commit to a new card is a wise choice for prudent consumers. Make sure you check out these very important details before making your choice.
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