The Path to a Lower Interest Rate

Dear Let's Talk Credit,

I was reading an article on how to lower your credit card interest rate and the author recommended finding out the prime rate. Can you please tell me where to find it? I would really like to call my credit card company and lower my 22.99% interest rate. Any advice would be greatly appreciated.

- Tonya

Dear Tonya,

Knowing the prime rate may help you understand the interest rate you're charged on your credit card, and that's a good thing. It won't help you lower yours, but let's start there anyway.

You are referring to the U.S. prime rate, which is an interest rate index based on the federal funds rate. Currently, the federal funds rate is at 0.25% and the prime rate is 3.25%. Banks and credit unions typically tie the interest rate on their credit cards to the prime rate. Usually institutions will add a margin to the prime rate to get the final rate that consumers pay. Some consumers with excellent credit may qualify for products below the prime interest rate. For example, some credit card issuers are offering 0% interest for a specified period on their cards. You may also find some institutions that offer car loans below the prime rate.

Check your credit card statement. It should state how your interest rate is calculated. Most card issuers have gone to a variable interest rate tied to the prime rate. Today, a consumer with a good credit history would likely qualify for a variable interest rate card with an annual percentage rate of 10.9 to 13.9%.

So the prime rate is probably cooked into the rate you're paying now. But because your interest rate is quite a bit higher than that, it is likely that you have made some late payments or you had less-than-stellar credit when you applied for the card. That means the prime rate portion of your rate isn't what you should be concerned about. The other part -- the margin -- is what you need to work on. Lenders will boost the margin and charge higher interest rates to compensate them for taking on extra risk, and that's what they've done with your credit card rate.

You have several options to get the interest rate lowered on your credit card. Before you get started, I suggest you find out exactly what your credit looks like. Go to www.AnnualCreditReport.com and order copies of your credit report. Then, purchase your credit score from www.myFICO.com for about $20 each, or directly from each of the credit bureaus. Once you know your credit score, you can compare interest rates and credit cards offered for your score, and you will have a good idea of a realistic interest rate to request from your lender.

If you have been making on-time and agreed-upon payments for at least three to six months on your account, contact the card issuer and request a lower interest rate. Be polite and courteous. Also, if you have offers from other card issuers at lower rates, be sure to mention that when you call. This gives you the leverage to say you may have to take your business elsewhere if your rate cannot be lowered. Don't give up if your card issuer says no. Call back another day -- you may reach a customer service representative who is willing to help.

If you are having trouble making your credit card payment, you could ask your lender if it has a hardship or forbearance program and whether you qualify for it. These programs will lower your interest rate or postpone payments for a short period -- typically six months to a year. Or, you might consider contacting a nonprofit credit counseling agency that is a member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. Your certified credit counselor will review your finances with you and make recommendations on how to solve your current problem.

Let's keep talking!