How To Lower your Credit Card Interest Rate

By Jason Steele
Reviewed by: Lauren Bringle, AFC®
Published on: 11/11/2021

While credit cards allow you to finance purchases, the line of credit you can use is considered a loan. And like any loan, you'll want to make sure that you have the lowest interest rate possible.

Why consider lowering your credit card interest rate?

A line of credit on a credit card is a loan, and any institution offering you a loan will charge interest. But unlike a car loan or a home mortgage, a credit card gives you a loan that's not secured by any actual property.

Since the credit card company can repossess nothing, the card issuer charges a high interest rate to compensate for its added risk.

So, is credit card interest tax deductible? The answer is no – credit card interest charges are never tax-deductible, so unlike a mortgage or student loan, your interest paid won't reduce your tax burden.

Another way to look at it is that when you pay interest on your credit card charges, you're increasing the cost of whatever you purchased. That means the cost of every trip to the grocery store, gas station, or department store goes up.

These charges can render your attempt to save money futile, and those who continue to incur interest charges will always be left with less money to save or spend on other things.

But thankfully, there are ways to lower your interest rates. Unfortunately, people who don't lower their rates miss out on a valuable opportunity to save money.

How to lower your credit card interest rate

So, wondering how to lower your credit card interest rate? There are multiple ways that you can lower your credit card's interest rate. First, apply for credit cards with the lowest interest rates you can qualify for. These will be cards with few features and benefits and those that don't offer rewards.

If you're trying to get a lower rate from the card you have, your first step is to try calling and asking for a lower rate. This strategy works best if the card you have is offered with a range of interest rates, and the rate you have isn't among the lowest already.

In addition, you will be most likely to succeed when your credit score is higher now than it was when you first opened your account. The card issuer will also be more likely to lower your rate when you have a long record of on-time credit payments.

You can also get a lower interest rate by opening a new account with a 0% APR promotional financing offer for credit card balance transfer. These offers let you transfer your existing balance to the new credit card, avoiding interest charges until the promotional financing ends and the standard rate applies.

However, keep in mind that most of these offers have a 3% balance transfer fee added to the amount transferred, and some have a 5% fee. And because these offers exist just to attract new customers, you can't move a balance between two cards from the same issuer.

How do credit card interest rates work?

How does credit card interest work? Credit card interest rates are advertised using the term annual percentage rate, or APR. Since all credit cards have an APR, it is easier to compare different cards. It's similar to how cars' fuel measurement - MPG or miles per gallon - makes it easier to compare how much it will cost you to run the vehicle.

However, the APR alone doesn't tell you everything. That's because credit card interest rates are calculated based on an account's average daily balance during its statement period.

Therefore, the card's annual percentage rate (APR) must be converted to a daily percentage rate to determine interest charges daily. This is done by dividing the APR by 365, the number of days in a year.

Additionally, most credit card issuers will use compounding interest, adding new interest charges to your balance each day. So the next day, your balance will be equal to the previous day's balance plus any interest charges. And at the end of that day, the interest charged will be calculated based on the new total.

These calculations are made at the end of the account's statement period when interest is added, so you don't actually see your balance rise every day.

What is the point of interest rates on credit cards?

A for-profit bank typically wouldn't offer a service if it didn't expect to make a profit. And even a credit union wouldn't typically offer services that it couldn't break even on. Interest rates on credit cards allow card issuers to cover their costs and to make a profit. Interest charges also enable cardholders to recover losses when some customers fail to make payments.

Furthermore, interest charges can be necessary for card issuers to recover the cost of marketing, customer service, administration, and the cost of producing and mailing cards. And because the credit card industry is profitable, banks and credit unions offer numerous products, often with no annual fee.

How is a credit card's interest rate determined?

Card issuers will determine a credit card's interest rate based on several factors. First, the rate can be set by the type of card offered. For example, a premium credit card with valuable rewards and benefits will have higher interest rates than simple cards with fewer features.

Credit card issuers will also set lower rates for cards designed for those with excellent credit. People with average or poor credit are often assigned a higher rate to compensate for the increased risk of default.

At the same time, many credit cards offer not just a single rate but multiple rates. For example, a credit card could offer a standard interest rate of 12.99% to 21.99% APR. Another credit card could offer rates of 13.99%, 15.99%, or 18.99%. Of course, ultimately, the rate you get will be based on your creditworthiness when you apply.

There are also several interest rates that a credit card can have beyond the standard rate for purchases. For instance, most credit cards impose a higher interest rate on the cash advance and a penalty interest rate that applies when a cardholder has made late payments. There could also be a different interest rate for balance transfers.

In addition, some credit cards offer temporarily reduced promotional rates or a 0% APR rate that applies to new purchases, balance transfers, or both.

Furthermore, most credit cards offer variable rates that can rise and fall with the Prime Rate. The Prime Rate is the rate that banks charge their best customers based on the federal funds rate.

And the Federal Reserve Board determines the federal funds rate. That means credit cards with variable rates will rise or fall by the same amount every time the Federal Reserve announces a rate change.

Do all cards have the same interest rate?

The credit card industry is very competitive. Many consumers choose their credit cards based on the standard interest rate offered. This gives card issuers a solid incentive to offer lower rates to attract new customers.

According to the Federal Reserve Bank, the average credit card in the United States has a standard interest rate for purchases of about 15%. Credit cards that offer generous rewards and the most valuable benefits typically have higher interest rates, as do cards designed for people without good credit.

A few ways to increase your credit score to land a lower interest rate include joining credit building programs or getting a credit builder loan.

A low interest credit card will be a simple card designed for those with good credit. These cards won't offer any reward points, miles, or cash back. And often, the cards with the lowest interest rates are provided by credit unions, which exist to provide services to their members rather than profits to their shareholders.

Do you get charged interest if you make your minimum payment?

Yes, you will incur interest charges if you make just your minimum payment. Furthermore, you'll incur more interest charges than if you made a higher interest payment. As mentioned above, credit card interest is based on your account's average daily balance. That means making a lower interest payment leaves a higher balance on your account, resulting in more interest charges later.

Is there any way to avoid credit card interest?

You can avoid interest charges by paying your entire statement balance in full. Strictly speaking, interest will still be incurred during your statement cycle. Still, nearly all credit card issuers will waive those charges when your statement is paid in full and on time each month.

Bottom line

Credit card interest charges are expensive, but there are ways to reduce your interest rate. Reducing your interest rate can enable you to pay off your credit card balances sooner, saving you money. It's worth taking the time to ask your card issuer for a lower rate or by applying for a new card.

About the author

Jason Steele has been writing about credit cards and personal finance since 2008, poring through the terms and conditions of credit card agreements to understand the minutiae of how these products work. His work has appeared on Yahoo, MSN, HuffingtonPost and other major news outlets. In his free time, Jason’s a commercial pilot. He graduated from the University of Delaware with a degree in History. See Jason on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on November 11, 2021
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