Credit card balances are rising faster than consumers can pay them off. And with a high interest rate card it can be difficult to even make a dent in debt.

According to Consumer Action, a non-profit, membership-based organization, a March 2004 survey revealed that only 39% of the people said they pay their credit card balance in full each month.

So if you are like 61% of everyone surveyed and carry a balance from month to month, then your number one priority for a credit card should be a low interest rate.

According to Linda Sherry, editorial director and spokesperson for Consumer Action, anything below 10% is an attractive rate in today’s market.

Are the savings really all that much with a low rate credit card? Here’s an example to show you just how much you will save.

Let’s say you have a $2500 balance on your credit card, you make the minimum 2.5% payment, and you don’t add any new charges to the card. With an 18% APR (annual percentage rate) it would take you 20.3 years to pay the card off at the cost of $3365.51 in interest alone!

If you are able to lower that interest rate to the average standard, fixed rate of 12.99%* you will reduce the time it takes to pay off the debt to 15.2 years and your total interest will be $1732.95—a 48.5% savings over the 18% APR.

But if you can qualify for a 9% APR, your debt will be paid off in 12.6 years with a total of $977.48 in interest—a whopping 71% savings over the 18% card. And if you commit to paying the first month’s minimum payment of $62.50 each month until the entire balance is paid off, then you will shave off another 8.6 years and another $494.01 in interest!
Who can get the lowest rates?

In order to get the lowest advertised APR you will need a good credit rating. While most issuers have their own criteria for a good credit rating, Sherry says that in general a FICO score of 675+ is good and 750+ is excellent.

Where you Can Find the Lowest Rates

If you do have a good to excellent credit rating, then according to Gerri Detweiler, founder of DebtConsolidationRX.com and author of The Ultimate Credit Handbook, if you are paying more than 10-12% you need to start searching for a lower rate card and there are several different avenues of approach.
Read Your Mail

Often times the best offers come right to your mailbox. But you need to read through the offer very carefully to determine if it is an introductory rate or a long-term rate (ongoing). Also, Sherry says you need to look for the words “you are pre-approved” as opposed to “you are invited to apply.” If it is an invitation only, you may not qualify for the rate advertised, and you won’t know until after you apply. You should also be aware that you may not get the rate advertised in a pre-approved offer. In fact, you may even be declined for the card. Please be aware that almost all of these mail offers are marketing schemes rather than true pre-approved offers.
Learn to Negotiate

Mail offers and other low rate credit cards you carry can come in handy as a negotiating tool with your current card issuer. Scott Bilker, creator of DebtSmart.com and author of Talk Your Way out of Credit Card Debt, suggests calling your issuer and letting them know you have better offers elsewhere and that you are considering switching to another card if they won’t lower your rate.

Don’t be afraid to take back control…in today’s saturated market, credit card issuers are looking to hang onto customers. If you want to know exactly what to say to a credit card customer service rep., check out Bilker’s book which contains transcripts from actual telephone conversations with reps.
Local Banks and Credit Unions

When shopping for a low rate credit card, looking to a local bank or credit union may be a good option. In addition to a good rate you may find the customer service more personal and appealing. But beware of banks that offer a rate significantly lower than the big banks or below the Prime Rate, especially if you know your credit is not good enough to qualify. Another thing to consider is that introductory rate offers from local banks and credit unions are not generally as aggressive as introductory offers from larger banks.
Associations

Sherry says it’s a good idea to investigate any credit card offers that may come through associations you are part of such as alumni groups. These large groups often have more muscle to negotiate special terms for their members. For example, for their members, AARP got the binding arbitration clause, which has come under scrutiny recently by consumer advocates, left out off the terms and conditions of the AARP credit card.
Online

4-Credit-Card-Application.com, offers detailed comparisons of the lowest rate cards currently available. Browse our Credit Card Catalog and conveniently apply online to start reducing your interest charges.

Variable vs. Fixed Rate Credit Cards

Most of the low rate credit cards offered today are variable rate cards. This means the APR is attached to an index such as Prime or LIBOR (London Inter Bank Offered Rate) and changes according to changes in the index. The credit card terms and conditions will say something like “Prime + 4%.” So if Prime is 6%, then your interest rate is 10%.

And although not currently common, it is still good to be aware that issuers can apply a floor, or minimum, to the rate. For example, if the terms are Prime + 4% with a floor of 10% and Prime drops to 5% you would get a 10% APR rather than the 9%. According to Sherry this was more common 3 years ago when interest rates really dropped, but became a less frequent practice as consumers started pressuring issuers to ban floors.

Even with low rate cards advertised as having fixed rates, keep in mind credit card issuers reserve the right to change the terms and conditions, including the APR, of the card for virtually any reason at any time. If changes do affect your fixed APR card, your issuer is normally required to give you 15 days written notice; so it’s very important to open all your mail because if you happen to throw out the notice, then you will forfeit any right you may be given to opt-out of the rate increase. And Sherry says once you make a purchase under the new rate terms, even if you didn’t read the notice, you have agreed to accept the new terms and conditions.

Credit card issuers can even change a fixed rate card to a variable card and vice versa with little notice. Fixed rates are rarely fixed forever. In the credit card world Bilker defines forever as the time it takes to pay something off. :0) The only real advantage of a fixed rate card is the rate usually doesn't increase as often as a variable rate card in a rising rate environment (this can work against you if rates are falling).

Is the low rate for purchases only?

Most of the time a low APR applies to purchases, but not cash advances. The cash advance APR is generally much higher. If you do end up taking a cash advance on a low rate card you need to be aware that issuers normally apply payments to the balance with the lowest APR—so your cash advance balance will keep earning interest (usually at a much higher rate) until your purchase balance is paid off. However, a few cards do come with a low cash advance APR, so make sure you read all the fine print.
Fees

Annual fees are pretty much a thing of the past. The one notable exception is credit cards that have very low ongoing rates, usually defined as being within 2 points of Prime. If you do come across a card offer that has an annual fee and rate within 2 points or so of Prime, then use our online calculators to compare the cost savings to a card without an annual fee and a little higher APR.

If you plan to transfer a balance to a low rate card, then determine how much a fee you will pay before initiating the transfer. Detweiler says a cap of $25 on balance transfer fees is generally okay, but if they charge a fee of 3-4% with no cap it’s probably not worthwhile. Doing a few calculations will help you determine if the savings are there.

Using a Low Interest Rate Credit Card to Your Advantage

The point of using a low rate credit card is to save you money if you carry a balance month to month. Here are some tips to make sure you are maximizing its usefulness.

Make your Payments Early

If your credit card issuer uses the average daily balance method to calculate interest (see glossary below), then you will benefit by making payments before the due date because it reduces the average daily balance your monthly interest is based on.

Manage your Credit Well

With a low rate credit card you need to make sure your payments are always on time, you never exceed the credit limit, and that your payment will be honored by your bank, otherwise you will end up paying the default, or penalty, interest rate which is significantly higher than the normal purchase APR.

Also, don’t max out the limit (i.e. carry a balance that is close to your credit limit) on your new low rate card because that will adversely affect your credit rating; and if your credit rating goes down, many issuers have the right to raise your APR. Detweiler says to use no more than 50% of your credit limit on any given card.

In addition, defaults on any other credit accounts can affect your low rate credit card. Most credit card issuers have a universal default clause in their terms and conditions meaning that if you default with any other creditor (not just another credit card company) they reserve the right to raise your APR to 20+% in some cases. Sherry says they have the right to pull your credit score and review your account. If they find any reason to raise your rate they will—as Bilker says, they are just waiting for the opportunity to do so. And even though the Truth in Lending Act requires they give you notice of an increased rate it doesn’t have to be in advance. So make sure you check your statement every month for any changes in the rates.

Tips for the Savvy Consumer

* Consider consolidating higher rate credit cards to your lower rate credit cards. It’s important to keep in mind, however, that credit card companies usually apply payments to the balance with the lowest APR. This means if your low rate credit card has an introductory 0% balance transfer APR and you are carrying a monthly balance on purchases, then your payments will reduce the 0% balance transfer first while you continue paying interest on purchases—the resulting APR is called your effective rate and it is normally much higher than the balance transfer APR. The effective APR should be indicated on your monthly statement.
* Detweiler says if you really want to save as much money as possible consider using a reward card for a big-ticket item. After you earn the reward, immediately transfer the balance to a low rate credit card. This technique requires self-discpline and attention to detail.