How to Lower Your Credit Card Interest Rates

Lowering the interest rate on your credit card is one of the top concerns for people who are stumbling under the weight of credit card debt.  So it’s no surprise that David Bach’s chapter seven in his new book “Debt Free for Life”, has the title of “How to Lower the Interest Rate on Your Credit Card”.

I’ve never personally dealt with carrying around debt on my credit card but said I’d be willing to check out his advice when Bach’s team asked me to review that part of his book.  The previous chapters talked about organizing and prioritizing your debt  – at this point in the book, the emphasis is on reducing the amount of interest you’re paying on your card or cards.

Finding the Best Interest Rates

The approach he suggests is one of negotiation, and in any negotiation it always helps to enter into it with as much information as possible.  The main idea is that you’re likely paying more interest than you could be so you should compare yourself against people around the country to see how much room there is to negotiate.

The book gives you a worksheet to track the balance and rates on each card and the progress of your negotiations.  Bach suggests finding out right away what rate new customers are paying on the same card that you have.   Then he breaks down the different interest rate categories based on your FICO score :

1. Super-Prime
2. Prime
3. Sub-Prime
4. Punitive
5. Promotional

His chart shows you which category you’d fall under and what interest rate you should expect to pay – based on your credit score.  Obviously if there’s a big gap that can be a talking point when you call up the credit card company.

Your Credit Score

If you don’t know your credit score, Bach recommends trying out a program from Equifax called DebtWise.  In an earlier chapter he explains how he came across the tool and worked with Equifax to add features that basically took the system he’s been teaching for paying off credit card debt and automates all the steps. 

Anyone who buys his “Debt Free for Life” book gets a DebtWise free trial for one month – I’ve never used the service but I agree that free is good.  Similar to other free credit score options available, if you remain a customer after the trial the service has a monthly fee.

Negotiating Your Debt

Once you know your credit score, what interest rate your score should qualify you for, and the interest rate being given to new customers you have enough information to begin negotiating.  Bach gives you several strategies for overcoming common obstacles when negotiating your interest rates.

There’s not a lot that Bach writes about that you couldn’t eventually figure out on your own but his tips can definitely save you time – and when you’re paying high interest rates time is money.   Bach’s big advantage is that he’s worked with thousands of people to get out of debt in his career so he’s seen what tends to work and what doesn’t.

In my opinion, the best feature of the book are all the examples he gives of former clients and what did, or didn’t work for them. Since I tend to learn better through examples and stories, I think these are the most useful parts of his book. I remember reading about Bach’s Latte Factor concept in his book “Smart Couples Finish Rich” right after my wife and I were married.  Some of the tales he shared of his former clients still stick with me to this day – so pay attention to those sections and learn from the experiences of others so you don’t make the same mistakes yourself.

One of his stories in this book explains how a client went through all his steps and was able to lower their interest rate.  However, it wasn’t as low as they’d like so she ended up signing up for a balance transfer card that gave her 0% interest on her balance for 6 months while she worked on paying it off.  I think this is a good example of how there’s no one right way to accomplish your finance goals – and sometimes you have to try several different things to find the best one for you.

Forbearance & Debt Management Plans

If negotiation doesn’t get your rate lowered and you’re really struggling because you lost your job, were injured, or are just earning less – then you can talk to your credit card company about restructuring your debt.  These are cases where companies are willing to work with you because your ability to pay back the money you owe has been dealt a major blow. 

Since this sometimes involves drastically lowering your interest rates and minimum payments, the credit card company does their homework to make sure you really have suffered a hardship and aren’t just trying to get out of money you agreed to pay.

The book explains how Forbearance and Debt Management Plans work and things you should be aware of before deciding to take that approach (such as frozen credit and damage to your credit score).  He also discusses alternatives to these strategies, such as credit counseling, and devotes a chapter later in the book to the topic.

Improving Your Credit

When it comes to your credit score, the saying “the rich get richer” seems to apply to the whole system.  People who have high debt to income ratios and a long history of good credit can borrow money at the lowest interest rates.  Of course, these are the people who probably have the least need to borrow money – in contrast to consumers with bad credit and high debt levels who are more likely to run into desparate times and need access to credit.

Once you’re in debt it can be tough to improve your credit score in order to borrow at lower rates. Next week I’ll cover another chapter in Bach’s book that explains how your credit score works and different ways you can raise it.

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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