Many Americans struggle with credit card debt. Even though home mortgage and auto loan interest rates are at or near historic lows, credit cards rates are not. Why?

Understanding the reasons behind the disparity is the first step in fixing the problem for you as a credit card holder. Having strategies to deal with the debt comes next.

Credit Card Debt: Economics & Interest Rates

Interest rates for mortgages and automobile loans are tied to Treasury note yields. As more and more nervous investors – influenced by Brexit and other factors – turn to bonds, yields go down and, with them, mortgage interest rates.

In fact, the correlation between Treasury yields and fixed mortgage rates is stronger than for any other consumer product, according to Bankrate chief financial analyst Greg McBride. 

Credit card interest rates, on the other hand, are influenced by the federal funds rate, which was increased by 0.25% in December. Since then the rate has not moved. For more insights, see Why are credit cards able to charge such high interest rates compared to other lenders?

Other Reasons Interest Rates Stay High

Three additional factors affect credit card interest rates that do not apply to mortgages and auto loans, according to Bankrate. These are:

  1. Unsecured debt Credit card debt is unsecured, which means if you default, the card issuer has no property to seize. Higher interest rates are a trade-off for the additional risk taken by the issuer.
  2. The CARD Act – In 2009 legislation known as the Credit Card Accountability, Responsibility and Disclosure (CARD) Act was passed and became law. This legislation took away lucrative revenue streams from card issuers, who turned to higher interest rates to make up for the shortfall.
  3. Credit scores – With higher risk comes a need for stronger vetting. Put simply, the lower your FICO score, the higher your credit card interest rate.

7 Ways to Fight Back

You don’t have to accept high interest rates as a matter of course. You can use one or more of a number of strategies to lower the interest you pay on credit cards.

Some involve working with your current credit card issuer; others involve moving to a new card; still others involve more drastic ways to manage your debt.

1. Target One Card at a Time

If you have multiple credit cards, pay the minimum due on all cards while paying more on the one with the highest interest rate until that card is paid off. Then start on the next one down the list.

2. Negotiate

Request an interest rate decrease and/or waiving of the annual fee. If you are turned down, threaten to transfer your balance. If that doesn’t work, transfer the balance to a card with a lower interest rate.

3. Transfer Balances

If you do decide to transfer the balance or part of the balance from one card to another, be aware that there can be balance transfer fees of as much as 3% to 5%. Factor that into your calculations and make sure the overall savings work to your advantage. 

4. Search for a New Card

If your transfer strategy involves searching for a new card, look for one with a grace period (20-25 days is typical). That way once you pay off the balance you have wiggle room before future interest rates kick in. 

Find a new card by using an online credit card search such as the one on Nerdwallet.

5. Secure the Debt

If other measures are not sufficient, you can turn unsecured (more expensive) credit card debt into secured debt via a home equity line of credit (HELOC). As a bonus, home equity interest payments typically are tax-deductible.

Watch out for closing costs, however, and be aware you are putting your home at risk if you default.

6. Improve Your Credit Score

Since your credit (FICO) score plays an important role in credit card interest rates, anything you can do to raise your FICO score will help immensely.

Bill McCracken, president of financial services research firm Synergistics Research Corp., says a FICO score above 720 will get you a 10-15% interest rate while one between 620 and 680 will raise that rate to more than 20%. 

For more see A Quick Way to Boost Your Credit Score.

7. File a Complaint

If you feel your credit card issuer has violated the CARD Act or is otherwise engaging in unfair practices, consider filing a complaint with the Consumer Financial Protection Bureau (CFPB).

The CFPB is charged with protecting consumers from financial fraud and abuse. So far, the agency has recovered nearly $11 billion for consumers. For further information, check out When, Why and How to File a Complaint with the CFPB.

Is Alternative Help Coming?

Mike Cagney, at alternative online lender Social Finance Inc. (SoFi), said recently that his company might seek approval for a state banking charter in Utah. If Cagney follows through, SoFi, known for excellent personal service and low interest rates, could soon enter the credit card business.

Importantly, this move could put pressure on banks to compete with lower rates – a real plus for consumers everywhere. 

The Bottom Line

Getting out from under credit card debt is not easy. It requires discipline and attention to detail. However, it is possible to lower both interest rates and the amount of interest you pay on credit card accounts.

Agencies such as the CFPB and companies like SoFi give credence to the notion that credit card interest rates can and should be reasonable. In the meantime, due diligence is the name of the game.




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