How to lower your credit card interest rates
Published Thu, Sep 22, 2016 Updated Tue, Feb 16, 2021
Credit cards are pretty simple as a concept and they can make life quite a bit simpler for you by taking the headache out of daily purchases and moving money around. However, the interest and charges you pay are anything but simple.
On top of that you have additional benefits such as cashback and rewards to content with, so it’s not surprise that credit cards can sometimes get a little complicated. Before you learn how to lower your credit card interest rates. there’s a few things you need to know…
There are three types of balance
There are basically three things you can do with your credit card:
Quite obviously, this is when you use your card to pay for stuff. This can be food, clothes, online purchases and various services – literally anything really. Most (if not all) credit cards will charge you interest on purchases but you will generally pay no interest for the first 30 days.
This is when you use your card at an ATM to get cash out – this sort of transaction generally incurs the highest amount of interest and is rarely included within the 30 day no interest period. As a rule of thumb you should not get cash out with your credit card unless it’s a real emergency. Oh and getting cashback at the shopping tills counts as a cash advance too, so be careful.
A balance transfer is something you will generally only do when you get a new credit card – it is where your new credit provider effectively pays off your balance on your old card and that debt is transferred onto your new card. If you shop around you can find cards with offers on balance transfers; you will generally have to pay 2-3% for the transfer but then you might get up to 6 months interest free.
The simplest way to keep your interest low is to only ever use your card for purchases and pay it off in full each month, but let’s assume that you can’t do that for whatever reason – maybe your income is inconsistent or maybe you have a backlog of debt to tackle.
At any given time your credit card balance might be made up of a combination of all three of these debt types, all charging different interest rates. Unfortunately you can’t specify which ones you pay off, so if you make a payment for 30% of your balance for instance, are you paying off the balance transfer or the cash advance?
Most credit cards will automatically use your payments to pay down the lowest interest debt (including the 0% interest stuff) first.
You get a new card and transfer your old balance onto it – after your 3% transfer fee your new balance is £1800, interest free for 6 months.
Each month you spend £300 and you pay off £600 a month. So you might think you are paying back your monthly spend and £300 off your balance transfer – pretty sensible.
In reality though, your balance transfer is given priority, which means that after month 1 you have £1800 in balance and £300 in purchases; all of your £600 goes against the balance and sometime in month 2 your £300 purchases balance will start accruing interest.
After month 3 you will have paid off your balance transfer, but you will be yet to pay off any of the purchases and you will have a total debt of £900 plus whatever interest that balance has accrued.
Clearly this is a bit sneaky and it means that if you transfer a balance in order to take advantage of an interest free 6 months you might not actually get your 6 months free anyway. To make matters worse the cards with the best balance transfer rates often have the worst purchase rates.
Finally, how to lower your credit card interest rates
Ideally you should only use your card for purchases if you want to lower your credit card interest rates – cash advances are a big no for obvious reasons, but you might legitimately have a reason to transfer a balance.
If this is the case then the best course of action is to have 2 cards, use one for your balance transfer and one for everyday purchases. Pay off the purchases card in full each month and pay off what you can on your balance card.
Or if you really want to get the most out of your debt, during that 6 months of interest free-ness, pay off your purchases in full and put the excess into a savings account where it will gain interest. Then once your 6 months is up, pay off all of your balance transfer in one lump sum (and if you can’t pay it all off, transfer the balance to a new card!)