In the simplest terms, your credit card interest rate is the cost you pay for having a credit card balance. The interest rate is most often expressed as an annual percentage rate, or APR.
When you make a credit card purchase, the credit card issuer gives you a grace period, typically between 20 and 30 days, depending on your creditor. The grace period is the amount of time you have to pay your balance in full without receiving interest charges. If you don’t pay the balance before the grace period, you’ll receive a finance charge. Your interest rate is multiplied by the balance to calculate the finance charge. The finance charge is then added to your balance and billed with your next statement.
The higher your interest rate, the higher your finance charges will be. Ideally, your interest rate should be as low as possible to lower your finance charges.
How Interest Rates Increase
Even though you might start with a low interest rate, it could increase for several reasons. If you make a late payment or go over the credit limit, your creditor will apply the default interest rate. This penalty rate could be as high as 28% or more. Not only that, many credit card agreements include a universal default clause that allows them to increase your interest rate “at any time, for any reason.” You might see your interest rate rise after you’ve made a late payment to another credit card.
In most cases, your creditor is required to notify you of an interest rate increase at least 15 days before the new rate takes effect. During this 15 day period, you have the option to close your card and continue to paying the balance at the lower interest rate. If you want to exercise this option, you must let the creditor know, in writing, before the 15 days expire.
Some credit cards, like department store and gas credit scores always have high interest rates. It’s best to pay your balances on these credit cards; otherwise you’ll always be subject to high finance charges.
Maintaining a good credit score will improve your ability of getting a low interest rate. The higher your credit score, the lower the interest rates you’ll be offered.
Getting a Lower Interest Rate
If you want a lower interest rate, your best option is to ask. Before you call your creditor, be sure you haven’t made any late payments or exceeded your credit limit. It helps if you’ve been given lower rate credit card offers in the mail.
Call your credit card issuer and explain that you would like to get a lower interest rate. Let them know you’ve been getting credit card offers for lower interest rates and might explore these options if you can’t get your rate lowered. Be polite, but firm. Ask to speak to a manager if necessary. If you’re not successful, don’t be afraid to transfer your balance to a lower rate credit card.