Best ways to reduce high APR on credit cards
APR, short for Annual Percentage Rate, is the cost of borrowing money from a credit card company. If you pay the balance in full each month, you won’t have anything to worry about. But you can also reduce you APR three ways. 1) call your credit card company directly and ask for a lower interest rate. 2) open a balance transfer card and transfer your balance to a card with a lower APR. Many companies offer promotions that allow you to use a card with 0% APR for 18-21 months. 3) Take out a personal loan if you need to pay down debt on multiple cards. While credit card APR can reach the high 20s, personal loans generally stand around a 5-10% interest rate.
You might have seen the headlines recently that read something like this: “US Credit Card Debt on Pace to Break $1 Trillion” If you’re reading this blog, chances are you are one of the people who are furthering this debt-ridden rocket ship. We have two pieces of good news.
First, you’re not alone. The average credit card with variable APR has risen steadily in lockstep with heightened interest rates, and many Americans are now looking at their monthly statements with widened eyes and raised eyebrows. Plus, if you’re still using the same credit card you had in college, you were likely locked in at a high APR to begin with, due to your limited credit history at the time.
Second, there are plenty of ways to turn the ship around and land it safely back on the ground, free of debt and free of worry. But before we dive into debt paydown strategies, let’s start with the basics.
What is APR?
APR, short for Annual Percentage Rate, is the cost of borrowing someone else’s money. If you pay the balance in full each month, you won’t have anything to worry about. Seems obvious, but given that $1 trillion number that forebodingly looms over all our heads, it feels like we could all use a refresher.
Although the interest on your credit card is represented annually in the form of APR, you might be wondering how you can expect to pay that out on a monthly basis.
Calculating monthly APR
Step 1: Determine your “Daily Period Rate.”
Divide your APR by 356. So if your APR is 20%, your DPR would be .054%.
Step 2: Multiply by the number of days in your billing cycle. In most cases, this number will be 30. Example: .00054 x 30 = .0162.
Step 3: Multiple that number by your average daily balance. In this case, let’s pretend you’re carrying a balance of $5,000. So .0162 x 5000 = 81.
So all in all, you should expect to see an additional $81 on your credit card statement at the end of the month.
What is considered a “high” APR?
There are two variables in the above equation, one you can control, the other…you can kinda control. The first is your average daily balance, which will vary depending upon - wait for it - how much you decide to use your card. Like we said, under your control. The other variable, interest rate, is partly out of your control, but it is not a lost cause. The average APR currently hovers around 20% (as of April, 2023). If your monthly statements show anything above that threshold, don’t panic.
Far too many Americans look at their monthly credit card statements without knowing that there are plenty of ways to decrease that ominous number staring back at them. Lucky for you, you’re reading this blog. Here are three ways you can go about saying goodbye to high APR.
Three ways to say goodbye to high APR
Ask for a lower interest rate
You might be sitting there saying, “I can do that?” Yes. Yes, you can. And you should. This recommendation is rooted in the age-old mantra, “it doesn’t hurt to ask.” If you’ve established a good history of making on-time payments and abiding by the terms of your agreement with your credit card issuer, you may be able to leverage your responsible behavior.
The best thing you can do is to call your credit card company directly. But be sure to come prepared with all the applicable information, including APR, grace period, statement due date and current balance. You’ll also want to do some competitor research beforehand. “Hey, Chase has an offer for 0% APR for the next 18 months. That sounds like a pretty sweet deal.” And if other companies have sent you offers to open up additional lines of credit, definitely use that to your advantage. The last thing your credit card company wants is to lose a valued customer. Especially one who isn’t a deadbeat.
Open a balance transfer card
Speaking of the competitive landscape, a balance transfer card can be a great way to reduce your APR and give yourself a bit of wiggle room when it comes to paying down debt. Opening up a balance transfer card is just a fancy way of saying “open up a new credit card with a different issuer.”
Example time: if you hold $5,000 on a CapitalOne SavorONE card, you can take on an additional line of credit from Bank of America by getting approved for their Americard. Once you’re approved, you’ll be able to indicate which balances you’d like to transfer. In this case, your CapitalOne account. Next, you simply enter the CapitalOne account number and the amount of money you plan to transfer to your new Americard.
You may even be able to qualify for a 0% APR on a new credit card for a limited time, although you’ll typically need good or excellent credit to qualify for that type of offer. Many companies try to attract new customers with the offer of 0% - sometimes even up to 21 months - but it’s important to note that this option is usually only available if you haven’t opened another card in a while. Googling “Best Balance Transfer Cards” will show you all the cards that allow you to pay no interest for the foreseeable future.
Take out a personal loan
Using a personal loan for credit card debt is an effective form of debt consolidation, and there are plenty of advantages to consolidating your debt into a single monthly payment. Personal loans are especially attractive for those who are carrying debt on multiple cards.
One of the primary reasons people opt to transfer their debt into the form of a personal loan is for the purpose of lowering the interest on the debt they owe. While credit card APR can reach the high 20s, personal loans generally stand around a 5-10% interest rate. It’s important to note that the interest rate will vary depending on a few factors, including your credit score, how much you intend to borrow, and the terms of the loan.
Even still, in most situations, taking out a personal loan gives you more wiggle room by allowing you to pay down debt with a lower interest rate.
The right debt paydown strategy for you
If you’ve racked up a lot of debt on a card with high APR, the first thing you should do is follow one of the above recommendations. Step 2: begin to pay it down. How?
There's no "right" way to pay off debt. But the idea is to pay it off with as little damage to your bottom line as possible. Here are two foolproof ways to go about doing so, and the difference between them boils down to nothing more than what keeps you motivated.
The Snowball Method
The Snowball Method is for people who stay motivated by small wins. The idea is to focus the bulk of your repayment in favor of your smallest debt obligation first and annihilate it before moving on to the next smallest one. So if you are carrying debt on three different cards, you’ll start by paying off the one with the lowest balance. One by one, obliterating these payments keeps you motivated and builds up your endurance to attack the bigger ones. Start by putting out the smallest fire first and work your way to the bigger ones.
Pros:
-Psychologically beneficial
-Reduce your total number of debt obligations faster
-Build momentum + confidence to attack your bigger balances
-Less daunting to start
-Usually easier to stay disciplined with this method
Cons:
-You might pay a little more out of pocket at the end of the day
-Takes a little longer because you're letting your higher rate loans grow exponentially which make them harder to deal with down the road
The Avalanche Method
The Avalanche Method takes the opposite approach and is Stash Wealth’s preferred method. Here, you start with your debt obligation that carries the highest interest rate. This is for people whose main motivation is coming out from under their loans by paying the least amount possible. High-interest loans are usually the most dangerous because if they get out of control, they have the ability to bury you.
Tier your debt obligations in order of their interest rate and start with the highest/most dangerous one first. Even though it may take longer to feel like you're getting ahead, you will come out ahead (dollar-wise) in the end. Using the same example, if you have three credit cards, you would start by paying off the one with the highest APR. Doing so will help you reduce the total amount of interest you owe over time.
Pros:
-Mathematically beneficial
-Pay the least amount out of pocket overall
-More efficient and cheaper in the long run
-Fastest method overall
Cons:
-Feels like it takes longer to "make a dent"
-Delayed gratification
-Can be easier to "fall off the wagon"
Using your credit card like an ddult
We can talk until we’re blue in the face about all the ways you can consolidate your debt, secure lower APRs, or formulate a debt paydown strategy. And those are all effective ways to help quell the onslaught of debt that can come with high APR credit cards. But none of them really account for the source of the issue in the first place: the question of whether or not you are using your credit card like an adult.
Don’t get fooled by “minimum payments”
Remember that credit card companies love to showcase the “minimum payment” in big, bolded font to make you think you don’t HAVE to pay anything more than that. But making minimum payments is the #1 way to get f*cked by a high APR. If you treat your credit card like a debit card, and only use it to spend money that you actually have, you’ll never have to worry about the interest rate. For all you care, the APR could be 80%. It wouldn’t matter.
After reading this blog, you now know the primary ways to reduce your APR, although if you find yourself overwhelmed by choice overload, that’s what we’re here for. We’ll analyze every aspect of your finances and determine the best route to take. In the same way that there’s no universal “best credit card,” there’s no single best way to pay down your debt. That’s why the Stash Plan is fully personalized for you, for your current financial situation, and more importantly, for your future financial goals. We’ll help you look debt right in the face, and feel no fear.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Priya Malani
Stash Wealth, Founder & CEO
Priya is a force in the personal finance space. As an industry disruptor, she specializes in bringing the unapproachable world of money to young professionals across the country.
