5 Ways to Handle High APR
Don’t let high interest charges eat away at your monthly payments! These debt relief solutions help you reduce high APR.
Credit cards with high APR can be extremely difficult to repay. A higher interest rate means more of each payment you make gets taken up by accrued monthly interest charges. As a result, you pay month after month but don’t really make any progress. It’s frustrating and costly.
What is a high APR rate, to be exact?
In general, lower APR is always better than high APR. You want the interest rates on your credit cards to be as low as possible. That way, if you carry a balance from month-to-month, the interest charges will be lower. Additionally, more of each payment you make can go to reduce the principal, rather than the accrued monthly interest charges.
For credit cards, the current national average APR is over 15%. The average rate increases for specialty credit cards, such as reward and cash-back credit cards.
At 15% APR, roughly half of each payment made goes to cover interest charges on a standard minimum payment schedule. If your balance is $5,000, the minimum payment would be $125 on most credit cards. Of that amount, $62.50 gets used to cover interest charges. This is why it feels like it takes such a long time to pay off credit cards debt.
What happens when APR gets too high?
At a certain point, APR can get so high that the minimum payment amount doesn’t cover the accrued interest charges. Most credit cards calculate minimum payments as a small percentage of your balance – usually around 2.5%.
But as APR increases, more of that payment must cover accrued interest. At 29% APR, the minimum payment would still be $125. However, $120.83 would cover interest charges. You’d only pay of $4.17 of the actual debt you owe.
At 30%, the minimum payment no longer covers accrued interest charges. In theory if you make a minimum monthly credit card payment at 30% APR your balance would increase. This is known a negative amortization.
Negative amortization: A financing situation caused by excessively high APR where your balance increases over time instead of decreasing.
In most cases, it’s illegal for a company to put you in a situation where you face negative amortization. Regulators consider this predatory lending, because it puts you in a position where it’s impossible to get out of debt.
4 debt relief options that solve high APR problems
#1: Interest rate negotiation
This is easiest way to reduce credit card APR if you aren’t behind with your payments. You call the creditor for each credit card directly to ask for a rate reduction. Customers in good standing with good credit scores typically qualify for lower rates. The longer you’ve been a customer and the fewer late payments you’ve had, the better.
Simply call the customer service department for each credit card you have and request an interest rate reduction. You may get passed up the customer service chain to a supervisor. It may be helpful to know your credit score and account payment history. This information helps you make your case to reduce the APR.
#2: Debt transfer
If the APR on one credit card is too high, the solution may be to move the debt to a different card. A debt transfer allows you to move balances from high APR cards to one with 0% APR on balance transfers. The 0% interest rate usually only applies for a limited time – anywhere from 6-24 months.
You want to pay off the balance in full before the introductory period expires. This ensures 100% of every payment you make reduces the actual debt you owe. You need a good credit score to qualify for the longest 0% introductory period possible.
#3: Debt consolidation loan
If you can’t move your debt to a credit card with low APR, you can use a loan. In general, the APR on personal loans is much lower than a standard credit card. With a good credit score, you can usually qualify for a rate at less than 10% APR. With excellent credit, you rate may be closer to 5% APR.
You take out the loan and then use the money to pay off your credit cards. This leaves only the low-APR loan to pay back. In many cases, your total monthly payment may be lower than what you paid on your credit cards. A lower term (length of loan repayment) increases the monthly payment amount. Aim for the shortest term possible to repay your debt quickly. Ideally, you want a term of 60 payments or less.
#4: Debt management program
If you have too much debt or bad credit, the options above may not work. In this case, you need outside help to reduce the APR on your debt. If you enroll in a debt management program through a credit counseling agency, they negotiate on your behalf. Credit counseling agencies have established relationships with creditors and track records of helping indebted borrowers. This means creditors may be willing to negotiate with a credit counselor, even if negotiation failed when you tried.
You can enroll in a debt management program regardless of your credit score. This makes a DMP a more viable solution if you’ve missed any payments or are having problems with debt.