Options for escaping penalty rate APRs


To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs. See her website for more personal finance tips and free budgeting worksheets.
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Question Dear Sally,
I have two cards with balances totaling $25,000. Due to late payments, my interest rates have risen to 24.9 percent. What can I do to lower my rates? – Katie


Dear Katie,
The best way to lower your credit card interest rates is to simply ask. Sometimes they’ll lower it; sometimes they won’t. It only takes a few minutes to call the number on the back of your card and find out.

If you’ve been late on payments, getting the results you want may not be so easy. Credit card companies are quick to raise interest rates to punitive levels at the first sign of trouble. Avoiding these penalty rates may be great motivation for never missing a payment, but once the rates are in force, making your payment is that much harder. It can start to feel like walking up the down escalator – and someone just sped the whole thing up.

I’d still ask for a rate reduction in your situation, especially if you were only late for a couple of payments – especially if you had a reason, such as serious illness, not getting your mail or a problem with online banking. If you have otherwise been a good customer, they should want to keep your business.

If you qualify, you may be able to get your old interest rate restored after making six consecutive on-time payments at the higher, penalty rate. These payments must have been made immediately after the rate jump. If you've been making payments on time since your slip-up, call your issuer to inquire about restoring your APR to its original rate. Note that the restored APR will only apply to the balances you had before the penalty rate was applied and may not apply to any recent charges.

If you can’t get the rate lowered on your current card balance by asking, consider paying off the cards with one or more other sources. Consider using savings, if you can do so without jeopardizing your emergency fund and other important goals. Savings accounts are earning less than 1 percent interest right now, so paying 24.9 percent interest on credit balances while getting next to nothing on a bank savings account is a losing deal.

If your credit is still good, you may be able to transfer part or all the balance to a 0-percent introductory rate card, or at least one with a lower interest rate. Try to get one without a balance transfer fee. If that’s not possible, a small transfer fee may be preferable to paying your current high interest rate. After you make a balance transfer, be sure to pay off your card balance before the introductory period is over.

You may want to look other places for money to pay off your cards. A home equity loan would have a lower interest rate and generally provide you with a tax deduction. As long as you use the home equity loan to pay off credit card debts just one time, and you resist the temptation to run up the cards again, this can be a good strategy. You may also look into getting a personal loan, such as from a family member. Or perhaps you can sell something, such as a car or motorcycle, to get out of debt.

I don’t recommend dipping into retirement accounts to pay off credit card debt. Retirement accounts are for retirement.

Another possibility is reaching out to a nonprofit credit counseling agency, affiliated with the National Foundation for Credit Counselors or the Financial Counseling Association of America. You can meet with a credit counselor for free to go over your budget and repayment options. If you and the counselor both agree, you could enter into a debt management program. In it, a credit counselor would work with your creditors to set up a repayment plan that often involves lower interest payments. You would then send in a monthly sum that includes your debt payments (plus a small fee) to the credit counselor, who then disburses the payments to your creditors over a set period of time. In the meantime, your card accounts are closed, preventing you from further charging.

In the meantime, concentrate on making all payments before the due date, every time. I find the best way to do that is to set up an automatic minimum payment with online banking. My minimum payment is always covered, even if I go on vacation or miss a notification. I then pay the rest of my balance every month when I read the statement.

There’s no shortcut to building a good track record of making payments. If you can’t get out of punitive interest rates by asking, by transferring the balance to another card or by paying it off some other way, remember that every month you make your payments, you’re one step closer to being considered a good credit risk. If you keep that up, you should qualify for lower rates soon.

See related: Will a debt management plan hurt your credit score?, Save money and your score with a DIY debt management plan

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Published: May 27, 2016

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Updated: 10-22-2016

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