If you’ve paid attention to the U.S. economy in the last few years, you’ve probably heard news segments demonizing banks for contributing to the recession by stiffing their credit card customers. While much of the criticism was legitimate regarding unfair practices, banks can’t be expected to lend at rates that put them at risk of insolvency. As an integral and important aspect of our free market system, the interest and fees you pay are the revenues they use to satisfy stockholders and to be able to continue to lend to consumers and businesses.
Understanding Interest Rates
The interest you pay is compensation to the lender for the privilege of being able to borrow. With an estimated $790 billion in credit card debt and nearly four percent of credit card accounts going unpaid, it easily demonstrates why interest rates are determined in part by the risk the lender takes on when agreeing to lend. Generally, the more risk you pose to the lender the higher the interest rate you’ll be charged. On the other hand, responsible consumers who pose less risk will enjoy the best rates and terms.
Most credit card companies use an average daily balance method to figure what you’ll pay in interest every month. Here’s how the calculation is made: Add the balances for each day of the month and divide by the number of days in that month to figure your average daily balance. Calculate your daily interest by taking the APR and divide it by 365; this is called the periodic rate. Multiply the periodic rate by the average daily balance to see what you’re paying in interest for that month.
Factors that influence the APR charged for a loan or line of credit are actions by the Federal Reserve, the bond market and the condition of the economy.
Interest and the rate of inflation are like dance partners. Inflation is a persistent increase in the prices of goods and services brought on by a rise in demand or the money supply; the result is the loss of the value of currency. When the rate of inflation rises, interest rates are likely to increase as lenders try to recoup the loss in purchasing power of their money and when inflation lowers interest rates decrease.
• The U.S. Federal Reserve
The Federal Reserve is the central banking system of the United States whose purpose is to design monetary policies to combat inflation, stabilize employment and work to prevent banking panics. They set the federal funds rate, which is the interest rate banks are charged to borrow money from one of the Federal Reserve Banks. Generally, when the Fed raises rates, the interest you pay to borrow money goes up. In the same way, the more the Fed charges banks, the more banks charge the consumer.
• The Bond Market
Interest rates are also affected by the fluctuations in the bond market that occur as a result of economic factors that include consumer confidence, manufacturing and industrial production rates, retail sales, employment and inflation. Primary lenders will adjust interest rates, if there is a bond adjustment.
• The U.S. Economy
In a poor economy, the dollar loses value, bonds dip and interest rates rise; in a booming economy the opposite happens. Consumers buy less in a bad economy lowering the amount of credit available and in turn the interest rates will be higher. The type of loan that is considered is also a factor; mortgages and other loans that are secured by some form of collateral usually have a lower interest rate.
While consumers have little immediate impact on the economic factors that affect interest rates, there are things you can do to lower them.
Call and ask. A simple phone call may result in a lower rate, as long as you’ve made your payments on time, have an excellent credit score and have a long-standing relationship with the lender. Challenge them by mentioning a better offer available from one of their competitors. If you’re dealing with unemployment or another hardship, your card company may have a program to help. A lower rate for 6 to 12 months may be enough time for you to get back on your feet.
Call again. Sometimes speaking to a different agent a few weeks after you initial request will bring a different result. These decisions often depend on the interpretive actions of the agent.
Consider a new card. If you have a decent credit score, shop around for a new credit card that comes with a low or 0% balance transfer offer. If you see a low interest rate offer online, or in the mail, go for it. Either apply for the offer or use it as leverage against your current lender by letting them know you’re prepared to switch.
If you want to avoid opening a new account, call another open credit card lender and ask for a transfer deal. Your existing card companies often will offer lower promotional rates.
The current average APR of 15.4% is reason enough for most credit cardholders to persist in getting a lower rate. Keep in mind that there’s no such thing as a permanently ‘fixed rate.’ Lenders will work with their most responsible customers to retain their loyalty. But never allow loyalty to a specific brand keep you from transferring your balance to a new card, if your current lender is unwilling to lower your rate.
Noreen Ruth is a contributor to www.wowcreditcards.com and numerous financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit.