Interest rates have been in the news throughout 2022, as the Fed has embarked on a determined fight against rising inflation. The idea is that if the Fed raises interest rates high enough, demand will wane, and prices will fall as a result.
In the meantime, though, this means that interest rates on everything from credit cards to home mortgages and auto loans are likely to continue trending higher. Rates that might have seemed high not that long ago are the new normal, and this is particularly damaging for those carrying balances on their credit cards.
The Average Credit Card Interest Rate
As of Oct. 7, 2022, the average credit card interest rate was 16.27%, according to data from the St. Louis Fed. For accounts that were assessed interest, that rate was significantly higher, at 18.43%. Both of those rates are well above the sub-12% credit card interest rates that were commonplace as recently as 2014. Even in 2020, the average rate for all cards was just 14.52%.
So, it’s clear that this is a tough environment in which to be carrying a balance on a credit card. At an interest rate of 18.43%, in a theoretical world in which you made no payments at all, that debt would double in less than four years. This is why it’s absolutely critical to get the lowest credit card interest rate possible if you will be carrying a balance.
How 0% Interest Rates Work
If you’ve got good-to-excellent credit, you may be able to avail of a 0% promotional interest rate from a credit card. As the credit card world is crowded with competitors, some issuers attempt to entice new customers by offering 0% interest rates that last for anywhere from 6 to 20 months. Depending on the issuer, these rates may apply to new purchases, balance transfers or both.
However, nothing is ever truly “free.” Usually, 0% promotional interest rates on balance transfers come with a 3% to 5% fee. Still, that’s a far cry from the high double-digit rates that a standard card will charge you. Ideally, you’ll be able to pay off your purchases or balance transfers during the promotional period and ultimately pay no interest at all.
Options if You Have a Poor Credit Score
The hard reality is that the lower your credit score, the more difficult time you’ll have finding a low interest rate on any type of loan, including a credit card.
One option is to use a secured credit card, in which any money you borrow is “secured” by a deposit. For example, a bank might issue you a secured credit card with a $500 “credit limit” if you deposit $500 into your account. Over time, your payments get reported to the credit agencies and your score may improve if you demonstrate responsible financial behavior. Secured credit cards often turn into traditional unsecured cards if you make timely payments for 12 to 18 months.
Another potential option is to call your creditor and ask for a break on your interest rate. Even if you have a low credit score, if you’ve never missed a payment, you may get a reduction.
If available, one of the best options would be to transfer your existing balance to a 0% promotional-rate card, and then use that 0% time period to pay off your debt as much as you can. While these types of options are usually reserved for those with good credit scores, you may be able to snag one if you have been a long-time cardholder with a good payment history. It never hurts to ask.
Remember: Don’t Plan on Carrying a Balance
Paying down your credit card debt should always be one of the very top priorities of your overall financial plan. While reducing the interest rate on any of your existing balances will help prevent your debt from growing out of control, the goal should always be to completely eliminate that balance. That way, you not only don’t have to worry about what interest rates are doing, you can divert your cash flow to your savings and investments instead of paying credit card interest.
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