Latest Federal Reserve Rate Means It Is Time to Check Your
Credit Card Rate

The Federal Reserve is actively working to cut interest
rates. Today’s .50 point rate cut is the second cut in ten
days, dropping the rate by 1.25 points. Rates have dropped
2.25 points since September. It is now time for consumers to
pay attention to their interest rate on their monthly credit
card bill.

“Cardholders should not assume that their credit card rates
are dropping just because the Fed is aggressively lowering
interest rates. The issuers have the freedom to adjust their
own rates,” says Bill Hardekopf, CEO of LowCards.com. “The
rates for some of the more popular cards have actually
increased. It is very important to make sure you are getting
the benefit of these rate decreases. If not, it is time to
shop around for a credit card with a lower rate.”

Despite a cut of 2.25 points in the federal fund rate since
September, some of the more popular cards have barely budged
with their variable rates. The rate for Blue from American
Express was 12.24% in September, dropped to 11.74% in
October, and is currently back up to 12.24%. Chase Freedom
actually increased its rate from 14.24% in September to
17.24% in January.

By comparison, other cards are dropping their rates. Citi
Platinum Select dropped their rate from 10.24% in September
to 8.49% in January.

“These rate decreases are good news for consumers. You just
have to look out for yourself to make sure you are taking
full advantage of these rate decreases. Be sure to look
closely at the Terms and Conditions of your credit card,”
says Hardekopf.

Years of easy credit and easy loans finally caught up with bankers and consumers and blew up into the current credit crisis that dramatically affects mortgages, credit cards and other loans.

Now the government is trying to jump in and save the day. Following a significant Federal Reserve interest rate cut on Tuesday, Congress is rushing to pass their own stimulus package.

Today, the House of Representatives has proposed to send a check of $600 per person or $1200 per couple to households that annually make between $75,000 (individually) up to $120,000 (per couple). They hope this will be in mailboxes by June, and their goal is for this money to be spent back into the economy.

“While anyone will be glad to receive this check, we believe there is a much better way for consumers to use this money. Instead of using it to buy more goods, consumers with any credit card debt should use this all of this money to pay
down that credit card debt,” says Bill Hardekopf, CEO of LowCards.com. “This is a great way to jumpstart your financial plan. Once you pay off your debt, then you will be able to buy what you can actually afford without using a credit card loan and paying extremely high interest penalties. This is the responsible way to stimulate the economy.”

The average household has $8,000 in credit card debt. Assuming that the average APR on this credit card debt is 14% and only the minimum payment of 2.5% of your balance
(initially a $200 payment) is made each month, then it will take the average household 278 months (23 years) to pay off that balance and it will cost $6,792 in interest.

If you use your $1,200 to lower the balance to $6,800, and you resolve to continue to pay $200 for the monthly payment, it will take only 3.7 years and cost $1,913 in interest payments.

“That $1,200 check and the resolution to pay $200 monthly will save you $4,879 in interest payments and you will be out of credit card debt 20 years ahead of time. That will completely change that consumer’s financial situation and have a tremendous effect on the economy in the long run. This is not only a prudent financial move, but it will also build a healthy economy for the future.”

Not only will a consumer save money by paying less for credit card interest, there could be a ripple effect that might mean lower rates for other loans. Paying down your credit card debt and lowering your debt utilization ratio will eventually raise your credit score. After your score improves, you can ask for lower rates from other creditors.

Today the Federal Reserve has made the third rate cut in four months, dropping the federal funds rate by 3/4%. This is intended to be a stimulus to help banks, consumers and the economy.

This cut could benefit credit cardholders in two ways:

1. The short-term effect is a lower interest rate and lower payment. If your balance is $5,000, then this will save you $3.13 per month. Add in the previous two rate cuts and the Federal Reserve has saved you about $6 per month. “This is not a tremendous savings, but it will help. It will be more meaningful if you apply that savings to pay down your minimum balance,” says Bill Hardekopf, CEO of LowCards.com.

2. The long-term effect could be more beneficial for consumers. The Federal Reserve is lowering the rates they charge banks, in hopes that this will encourage the banks to pass lower rates along to consumers. They also hope this will encourage banks to expand their loans to consumers. In recent months, banks have tightened their loan approvals, including credit cards and home equity loans, in response to the subprime credit crisis.

“There is an interesting dance playing out here. Banks have just been burned by years of easy credit and making bad loans. In response, they tightened the loans process, making it more difficult to get credit, and now the Federal Reserve
is dropping interest rates to encourage additional lending. It will be interesting to see if we can find a perfect balance between lenders and creditors.

“This cut may enable issuers to approve more credit card applications. Due to the economic climate over the past six months, they have tightened the approval process and it has been harder for consumers to get approved for a credit card. Now, this may help more applicants get approved.

“While the credit industry still seems to be trying to get back on its feet, cardholders must protect themselves. Take this time to contact their own issuers and ask for lower interest rates. Pay your bill on time and to get your minimum balance to under 30% of your credit limit,” says Hardekopf.

This week credit card issuers are releasing their fourth quarter results and the words “charge-off” and “delinquency” will be the theme. These are additional signs of consumer credit stress that started last year after the subprime mortgage collapse.

These are more than just words that appear in an annual report. An increase in charge-offs and delinquencies is bad news for the entire credit card industry and its
cardholders. They are an indication that consumers can’t pay their bills and can’t afford what they are buying. While this obviously indicates a problem for the issuer, it also is a serious issues for consumers.

A charge-off is an accounting entry that occurs if a credit card account has not been paid (delinquent) for over a period of time, typically 180 days. The issuer will remove the account from its books as an asset. After the account is charged off, the outstanding balance is then classified as a loss. This means that the lender has given up hope on collecting the debt. The lender then sells the debt to a
third party, typically a collection agency, that will attempt to collect the debt. Since the collection agency gets to keep the money they collect, they will be very
persistent about collecting what is owed.

“A charge-off is not a magic eraser that simply removes the debt. It does not free the cardholder from paying the debt. After the chargeoff, the cardholder has to deal with the pressure from a collection agency. Unless they declare bankruptcy, they will have to pay something for that debt plus interest and fees” says Bill Hardekopf, CEO of LowCards.com. “To make the situation worse, charge-offs are devastating for a credit score. It shows that you have a history of not paying your bills and this will cause you to pay very high interest rates for any future loan you apply for whether that be a car loan, home loan or even a new credit card.”

Every credit card consumer can be affected by charge-offs, even those that pay off their balance every month.

“An increase in charge-offs means that the issuers are losing money, and they are going to have to find revenue to make up for those losses. This means that they may look to every cardholder to pay a little more,” says Hardekopf.

“Over the past two years, we have observed issuers adding fees to balance transfers, reducing grace periods, increasing late fees and over the limit fees, and increasing
the cash advance rate. It seems like all of these are very high now and that there is no way they can squeeze another penny out of consumers with these fees. But we also used to complain about paying $2 for a gallon of gas, and now that seems pretty cheap,” says Hardekopf.

“Credit card issuers are also reducing their credit risk as well as tightening their approval requirements. If you have average to poor credit, it could be more difficult to get a credit card. After the tightening of home equity loans and credit cards, there are not many places left to turn for credit if you have an average credit score or some negative marks in your credit past. Your only option for credit might be secured credit cards.”

If there is one thing we learned from the mortgage crisis of 2007, it is that debt has consequences. If used incorrectly, debt can be painful for both the lender and the person with the loan. If you have debt, especially credit card debt, then you have the potential for a credit crisis. Here are some consumer tips to help reduce your debt in 2008.

1. If you have debt, realize that it took you a while to get into debt, and it will probably take you longer to get out. Do not get discouraged, no matter how much you can pay off or how long it takes. Being debt-free is worth the effort.

2. Get a clear picture of your debt. It is easy to simply pay the minimum balance on each bill without knowing exactly how much you owe. Collect all of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a summary sheet that lists the creditor, monthly payment, balance, interest rate, and credit limit for each. List the status of each account, if any bills are past due, and verify the payment due dates.

3. Prioritize which bills to pay first. If money is short and you have to make choices about what to pay, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then pay the secured loans such as your car loan. Since credit cards are unsecured, they should come last.

4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. You can shop around for a mortgage or credit card with a lower rate, but start with your lender to ask
for a lower rate. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. It is better business for them to have you keep paying your debt and interest payments, and avoid bankruptcy and foreclosure.

If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor or someone who can. Persistence may be
necessary to find the person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results.

5. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first. If your rate is above 10%, transfer the balance for that card to one that offers 0% for 12 months for balance transfers. If you get the 0% for 12 months, this is a great opportunity to pay down your balance. To take full advantage of this 0% interest, pay as much as you can
above the monthly minimum.

You must be diligent about paying this on time. A late payment can immediately increase your rate to the default rate. Most cards charge a balance transfer fee of 3%; pick one that has a cap on the balance transfer fee. The amount you save on interest payments should more than offset the fee. Since the purchase APR may be higher, do not even put the card in your wallet; simply use it to pay off your
balance. Continue to pay the minimum on your other cards until the highest rate is paid off, then focus your effort on the card next in line.

6. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone. If you use cash, you will not only save money on interest, but also reduce the amount you spend.

7. Pay more than the minimum payment for your loans, especially credit cards. Credit card issuers set the minimum payment at approximately 2% of your balance. This makes the payment smaller, but almost impossible to pay off the balance, so try to add at least $10 to your minimum payment. Here is an example of the benefits of paying more than your minimum balance: assume you have a credit card balance of $8,000 and your interest rate is 12%. If you pay just the minimum payment of 2% each month, it will take 346 months to pay off the balance and will cost $7,696 in interest. If you
pay 5% of your balance each month, it will take 109 months to pay and cost $1,579 in interest.

8. If you are surprised by your current rates, check your credit report. It may contain an error that is creating a higher credit score and higher interest rates for you. If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or can’t be verified. You can make your dispute by mail, telephone, or online. If the corrected error results in a higher credit score, contact your creditors to make sure they know about your improved score, and ask for a lower interest rate.