Stop Wasting Money on Credit Card Interest

Story time. So in my early 20s I was working an internship in Atlanta. I was a thousand miles away from home, I didn't know many people, and I had just broken up with my girlfriend. So maybe to feel better I thought it was a great idea to spend some money on my credit card. I paid for tinted windows on my Honda Civic, I bought pricey audio speakers, and just a bunch of other things I couldn't afford. Long story short, that unnecessary spending didn't make me feel any better. But it did land me in a heap of credit card debt. That's when I first learned how punishing credit card interest can be. It felt like I was just wasting money sending extra cash to the bank each month. Flash forward to today, interest rates are expected to rise maybe even a bunch of times over the next few years. What does that mean for you? It means that balances carried over month to month on your credit cards will become more and more expensive. And people already pay a lot. 1,200 bucks. A NerdWallet study found that the average US household with revolving credit card debt pays almost $1,200 in interest charges each year. That's real money. So if interest rates go up like they're expected to, the expense and the stress of carrying credit card debt is only going to get worse. But there are steps you can take. Let's talk about 10 ways to save on credit card interest and stop wasting money. So some brief background, we're not going to get into the weeds on economics or US monetary policy. But the quick overview here is that when the US Federal Reserve raises interest rates, credit card companies typically raise interest rates on your unpaid credit card balances. Those rates usually move together really in lockstep. So when you see news headlines about the Fed raising interest rates, that's bad for borrowers, like people with credit card debt. So the number one way to save on credit card interest is to pay none at all. You do that by paying off your balance every single month. Of course, that's easier said than done. Like me, everyone has their own credit card stories to tell. And in the US with higher inflation and relatively stagnant wages, many of us just can't zero out that balance month after month. But as we talk about saving on interest, let's keep that in mind. Tip number two, don't pay just the minimum. If you can't pay the entire monthly balance, try to pay more than just the minimum payment. Every extra dollar that you can throw at the credit card debt is one less dollar that's charged interest. So say your minimum payment is $150. Maybe you round that up to 200 each month. Or if you get a windfall, say like a tax refund, throw that extra money at your credit card bill. If you have lower balances, you'll pay less interest. Tip number three, ask your issuer for a lower rate. It's so simple, you might overlook it completely. But it can be really effective. Simply call your credit card company and ask for a lower rate, or what they call an annual percentage rate, APR. You do that by just calling the phone number on the back of the card. So this tip kind of falls under the category, it never hurts to ask. That's especially true when you have a lot of people paying interest rates of 20% or more on their credit cards. As we record this, the Federal Reserve says the average credit card rate is over 16%. So that's pretty high. So back to making your phone call. When you call the credit card company, be clear about what you want. You may say something direct like, I'd like to request a lower interest rate. Another big thing, be nice. This is a business conversation. Try to set aside your money stress and just have an emotional conversation. If you have a good track record of paying on time, this strategy works surprisingly well. Tip number four, get a card with a lower interest rate. Another way to pay less interest is to get a different card entirely, one with a lower interest rate. Some cards even offer no interest at all for an introductory period. Another thing, you might not have thought about joining a credit union, which is very similar to a bank. But you'll often find credit unions offer low credit card rates and much lower than the big banks. So they're worth checking out. So tip number five, get a balance transfer credit card. How do you save on interest on your current credit card balances? There's a card for that too. It's called a balance transfer credit card. Now these cards have an introductory rate of 0% on balance transfers for a number of months. Well, how does that work? Well, basically you transfer your credit card balance from your existing credit card onto this new card, and then you won't have to pay interest for a while. The best balance transfer cards offer 18 months of no interest. Granted, this does not get rid of your debt. It just moves the debt from one card to another. But a balance transfer can give you some breathing room. That's the point of this. Some time to pay down your debt without racking up more interest. A couple of things to know though. You'll probably have to pay a balance transfer fee. That's typically 3% of the amount transferred. So that's $30 on a $1,000 transfer. That's no fun to pay, but it could be worth it. The other thing is that banks don't let you transfer balances to one of their own cards. So if your expensive balances are on a card with Bank A, for example, you should apply for a balance transfer card from a different bank. It's true that paying less interest is nice, but just surfing your balances from one card to another is not a long-term solution. The end game here is to pay them off completely. So if you have a lot of debt, maybe even tens of thousands of dollars, you might need a strategy that doesn't involve new credit cards. If this sounds like your situation, these next tips might help. One of the better options is to get a personal loan from a bank. That assumes you have decent credit. It's also sometimes called a debt consolidation loan, but it's basically the same thing. You might find the interest rate is far lower than your credit card rate. For example, you might have four credit cards that all charge around 20% interest. If you have good enough credit to qualify for say a 7% consolidation loan, you'll be saving significant money on interest. The idea is that you would use the loan money to pay off the credit cards. Then each month, you would just pay one bill with a lower interest rate. You'll save money on interest and you'll save hassle because you're only dealing with one creditor. Like with most loans, borrowers with better credit will qualify for the best personal loan rates. Number seven, use your home equity. If you're a homeowner, you might be able to use your home equity to pay less credit card interest. How would you do that? Well, there are several financial products you can use like a home equity loan, a home equity line of credit, a cash out refinancing of your home. The idea here is that you're essentially borrowing from the stored up value in your house. Then you're using that money to pay off the credit card debt. The advantage is that a home equity loan or a line of credit will carry a much lower interest rate than credit cards. But this is a kind of a risky strategy, especially when there's a chance you won't be able to pay. That's because this has some significant downsides. If you don't pay a credit card, the bank can report you to the credit bureaus and damage your credit. Granted, that's bad. But if you don't pay a home loan, the bank can take your house. That's worse. Tip number eight, take out a 401k loan. If you have an employer sponsored retirement account, like a 401k plan, that's money you can potentially tap to pay off credit cards. The idea is that you would borrow from yourself essentially by taking out a loan against your 401k plan. Then you pay yourself back. But again, there are risks and many financial advisors really don't like this idea. It could hurt your efforts to grow your retirement money over the long term. And if you can't repay yourself, you'll owe a hefty penalty plus taxes on the unpaid balance. So it's not a simple fix without consequences. Tip number nine, debt management plan. If you're not making any progress on paying off credit card debt, consider a nonprofit credit counseling agency. These agencies can set up what they call a debt management plan or DMP. They'll work with the credit card companies to cut your interest rates and maybe get some penalties waived. Then it puts you on a repayment plan. You'll pay the counseling agency a fixed amount each month and it will pay the credit card company. DMPs typically last three to five years, but there are downsides too. While you're on the plan, you probably won't be able to use those credit cards anymore. And you'll have to pay the agency some fees like an enrollment fee and monthly fees can still be worth it though. Tip number 10, consider bankruptcy. In extreme cases, you might look for a bankruptcy attorney. What's extreme? Like if your credit card debt is more than half your income, that's a good rule of thumb. You might truly be in over your head. The first meeting with the bankruptcy lawyer is usually free, but you will have to come up with cash to pay the lawyer before they file your bankruptcy court case. Bankruptcy can eliminate many of your debts, including credit card debt, but it has severe downsides for sure. Like bankruptcy can stay on your credit report for up to 10 years. That's right. A decade, a decade of bad credit, but at some point debt can just become unmanageable and bankruptcy becomes a logical choice. So what's the bottom line here with saving on credit card interest? Well, as I said, when I was a young man, I was in credit card debt myself, but I was fortunate enough to have a no interest loan from my grandfather. I remember how embarrassing it was to accept that money, but at least I wasn't paying interest anymore. Even if you don't have a benevolent grandfather to give you a loan, you're not stuck paying sky-high interest on your credit card balances every month. That's the main takeaway here. It's possible to waste less money on credit card interest. Just use one, one or more of these strategies and you can work toward the long-term goal of getting out of debt while paying less interest. I'm Greg Karp, a credit cards expert at NerdWallet. If you're interested in learning more about saving on credit card interest, see our articles on nerdwallet.com. It's one of our favorite topics to help with. And if you have a question, let us know in the comments below.