When you look in peoples’ wallets these days, you’re more likely to see a credit card than you are to see any cash. Cards are just so much easier to use, aren’t they? Especially with contactless payment, you can just tap and go. But why does the APR (Annual Percentage Rates) on credit cards have to be so high?
Let’s find out.
Why Are Credit Card Interest Rates So High?
It’s easy to think that credit card companies charge high interest rates just to make a lot of money. But that’s not it. The reason for having high APRs is that when credit card companies lend you money, they’re taking a higher risk.
With a mortgage, if you don’t make your repayments, the lender can sell your house. That way they’ll get their money back. Same with a car loan, if you don’t pay, the finance company will take the car away. Credit card companies have no rules on what you spend your money on – and they don’t ask. You can spend the money on whatever you like, up to your credit limit.
This means credit card companies don’t have anything they can take from you if you don’t pay. They’re at greater risk of losing their money.
This is also why credit card companies rely on your credit history. With a good credit score they know there’s a good chance you’ll pay them back. With a poor credit score, there’s a chance you won’t. That’s why there are some credit cards for people with bad credit but they have a higher APR.
If you’re paying high interest on a credit card, what can you do to bring it down? Let’s find out.
How to Reduce the APR on Your Credit Cards
If the interest rate on your credit card is high, you might find that half of your repayments are going on interest. That doesn’t help when you’re trying to pay off your debts. So, here are ways of reducing the interest on your credit cards.
1. Improve Your Credit Score
Easier said than done you say, but you can do it. Check if you’re doing these things:
- Make sure you’re registered on the electoral role.
- Don’t miss any repayments.
- Make sure the amount you’ve borrowed isn’t more than what you’re earning. If it is, get your debts down as soon as you can.
- Don’t max out your credit card. Try to use less than the credit limit you’ve been given.
- Don’t make too many new credit applications at once, it makes you look desperate for money.
When you keep these points in check, you’ll stand a better chance of improving your credit score. Once you’ve got this, you can look at how to bring down the interest rates you’re paying.
2. Transfer your Credit Card Balance to a 0% Card
It might seem obvious but lots of people keep paying high interest rates when they don’t need to.
There are plenty of credit card companies that’ll let you do a balance transfer and pay zero interest. Yes, they do charge a transfer fee. But this is often less than a couple of months interest that you’d be paying if you kept your debt where it was. So, it’s worth it.
3. Taking Out an Instalment Loan to Pay Off Your Credit Card
If your credit score isn’t good enough for a 0% card, do this instead. You could take out a loan with a lower interest rate than your credit card and use that to pay off your card. By doing this you could reduce your monthly repayments to something you know you can afford. Then keep up with the loan repayments and you’ll improve your credit score.
4. Choose a Credit Card Company That Gives You Something Back
Have you got no choice but to pay higher interest rates? If this is the case, choose to borrow from a company that gives you perks. Some credit card companies will give you cashback or reward points.
With Drafty’s line of credit, an alternative to a credit card, you get access to a load of discounts. You can use them in shops, restaurants, travel and all kinds of things. You might not get a lower interest rate but at least you’ll be saving money elsewhere.
In Summary
Now you know why credit card companies charge such high APRs. They just need to protect themselves in case you don’t pay the money back. But you can find ways of paying less interest.
Look after your credit score and shift your debt where you can to reduce the interest. When moving your debts, remember to cut up your old credit cards so you’re not tempted to spend on them again.
Most of all, keep your borrowing under control. Before you spend on your credit card ask yourself, if you can’t afford it, is it worth getting into debt for.
Disclaimer: We are not providing financial advice, these are just tips for informational purposes.
