If you wanted to get out of debt in 3,000 B.C., the best advice was to toss your credit cards into the nearest volcano.
VISA and American Express didn’t exist, of course. America itself wouldn’t come along for another 4,776 years.
But the lowest interest rate on borrowed money in 3,000 B.C. was 20%, so you can imagine an Egyptian Express card would have had at least a 25% interest rate.
Sadly for credit card users, not much has changed in 5,000 years.
Credit card interest rates still skyrocket toward the 30% stratosphere, despite the fact worldwide interest rates are at their lowest since 3,000 B.C.
That nugget of financial history comes from Bank of America Merrill Lynch, which somehow figured out what it cost to borrow money when Pharaoh Djer was kicking off the First Dynasty of Egypt.
Borrowing is much cheaper now, though credit card companies haven’t gotten the memo. The average APR for new credit cards was 15.18% in mid-2016.
The average for applicants with poor credit scores was 22.56%. One South Dakota bank was even peddling a card with a 79.99% interest rate for consumers with bad credit histories.
America’s total credit card debt was $712 billion in 2015, leading millions of consumers to ask one question: How can I lower the interest rate on my credit card debt and stop throwing so much money away?
One way is to simply get another credit card, one offering a low introductory interest rate. That’s a relatively easy way to lower your monthly payments, but it’s often not the best way to approach debt management.
The other popular options are debt management programs, credit consolidation and home equity loans. Each one enables you to consolidate debt at a lower interest rate than credit cards.
For instance, the national average for a 10-year, $50,000 home equity loan was 5.491% in August of 2016. That was available for consumers with credit scores of 740 to 850.
If your credit score was 670-699, the interest rate rose to 7.066%. If your score was 620-639, it rose to 9.186%.
Similar rates exist for debt consolidation. The higher your credit score, the lower your interest rate.
In real terms, that means consumers with top-notch credit would pay $542 a month. Consumers with mediocre credit scores would pay $582 a month, and those with poor credit would pay $656 a month.
That’s still a lot cheaper than the average credit card, though credit card marketers invariably offer an easy escape from double-digit interest rates. It’s the old balance transfer, where you simply move all your debt to a new card with a low rate, often 0.0%, but there is a catch to the deal.
That catch is that low rate is actually a time bomb. The introductory offer jumps back to the usual 15% range or higher after 12 to 18 months. There’s also usually a transfer fee of 3% to 5%, meaning you’d pay as much as $500 to put $10,000 in old debt onto a new card.
One thing you’ll notice with all these options is the weight lenders put on your credit score. The strategy for improving that all-important number is simple: pay your bills on time. Pay off outstanding debt. Keep your credit card balances low.
That’s the only way you’ll ever escape those stratospheric interest rates.
It takes time and dedication, which is why debt management is often the best answer to the question of how to get lower interest rates.
It addresses not just the symptoms of the debt problem (high credit card balances, late payments, lack of savings), but the cause (YOU!).
It might not be your fault that you got laid off or have a medical emergency, but it is up to you to live within whatever means are available. With a debt management program, a non-profit organization works to lower interest rates and late payment fees with your creditors so that you have a smaller monthly payment for credit card debt each month.
You make one payment a month to the non-profit credit counseling agency, which then pays your bills. The interest-rate varies, but is usually somewhere around 9%. That is typically 5% to 10% lower than what consumers were paying to credit card companies.
That takes care of the symptoms of the debt problem. As for the cause, debt management plans look at your entire financial situation and set up a long-range financial plan. Instead of simply moving debt around, which is what happens when you get a new credit card with a low introductory rate, a debt management plan includes a budget that actually gets rid of that albatross.
That requires behavioral changes, like not using credit cards. But certified debt counselors help keep consumers focused on their goals.
The ultimate goal is to eliminate credit card debt. Among the side benefits are a better credit score, which means you’ll qualify for better interest rates on mortgages and loans.
When you apply for a new credit card, you’ll also be able to wave a happy goodbye to those 24% rates. There’s no sense living as if it’s 3,000 B.C. if you don’t have to.
Kollmeyer, B. (2016, June 14). Charting the lowest interest rates in 5,000 years, worst commodity returns in 80 years. Retrieved from http://www.marketwatch.com/story/charting-the-lowest-interest-rates-in-5000-years-worst-commodity-returns-in-80-years-2016-06-14
NA, (2016, Aug. 10). FICO Home Equity Center. Retrieved from http://www.myfico.com/loancenter/homeequity/
Williams, G. (2016, May 24). The Pros and (Mostly) Cons of Balance Transfer Credit Cards. Retrieved fromhttp://money.usnews.com/money/personal-finance/articles/2016-05-24/the-pros-and-mostly-cons-of-balance-transfer-credit-cards