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Download How to Lower Your Credit Card APR

Deflate Your Rate: How To Lower Your Credit Card APR

By MASSPIRG Consumer Associate and the state PIRG Consumer Team

  Download the full report.

Background

At the end of the year 2000, U.S. households were accruing interest on $574 billion of revolving credit card debt, or debt carried over to the next month rather than paid off entirely. The average household with a credit card balance carried revolving debt of nearly $10,000. A household making the minimum payments—commonly only two percent of the unpaid balance or $20, whichever is greater—on this debt would pay nearly $1,500 in interest just in the first year. Nationally, consumers pay interest of more than $87 billion annually on this revolving debt. Cardholders paying only the minimum balance accumulate interest on top of interest, paying far more than their share to credit card companies.

An estimated 55-60 percent of Americans carry credit card balances. One recent study found that nearly half of those with balances made just the minimum payment in February 2002. This means that about one out of four cardholders in the U.S. now make only the minimum payments. In the same month, about 37 percent of Americans who could not pay off their balances paid less than half their outstanding balance, and only 13 percent of consumers with an outstanding balance could afford to pay more than half the balance.

While American consumers accumulate more debt, between 1995 and 1999 the credit card industry's profits rose by 274 percent, from $7.3 billion to $20 billion. In addition to keeping interest rates high, the industry has increased its income from late payment fees and over-the-limit fees, among others. In 2000, fee income accounted for 25 percent of credit card companies' total income, and between 1995 and 1999, total fee income increased by 158 percent, from $8.3 billion to $21.4 billion.

Further, the industry increased its bottom line (at the expense of consumers) by not passing along massive decreases in its own "cost of money" when the Federal Reserve reduced the prime rate. In the past year alone, the Fed has reduced the prime rate eleven times (from a high of 9.5 percent on May 17, 2000 to a low of 4.75 percent on December 12, 2001), yet average credit card rates have remained at or around a 14 percent annual percentage rate (APR). Many variable rate credit cards—cards with APRs that fluctuate with the prime rate—now have invoked "floor rates." Since early 2001, many variable rate card companies have refused to reduce their APRs as the prime rate fell, arguing that their contractual floors have been reached.

In response to these shocking statistics and the lack of government action to protect consumers, the state PIRGs investigated whether consumers could fight back on their own against unfair and unreasonable credit card interest rates. Deflate Your Rate reports on our study and offers consumers ways to lower their credit card interest burden.

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Findings

A 1998 Federal Reserve survey of 2,000 credit cardholders found that 81 percent felt their annual percentage rate (APR) was too high. In January 2002, the state PIRGs conducted a survey to show one simple action consumers can take to lower their credit card interest rates and save themselves hundreds or even thousands of dollars.

Volunteers participating in the survey called their credit card company and asked for a lower APR. The results from a national spot survey of 50 consumers were the following:

  • With one 5-minute phone call, 56 percent of consumers who called their credit card company lowered their APRs.

  • Those who were successful reduced their APRs by an average of more than one-third, from an average of 16 percent to an average of 10.47 percent.

  • Three consumers were able to reduce their APRs by 15 points.

The survey results also showed a correlation between the cardholder's credit history and the likelihood of receiving a reduction in the APR. Factors affecting the caller's success rate were:

  • Length of time with a particular card (longer is better)

  • Credit limit on that card (a higher limit is better)

  • Unpaid balance-to-limit ratio on that card - how "maxed out" the cardholder is (a lower balance, making a lower ratio, is better)

  • Unpaid balance-to-limit ratio on all cards (a lower balance is better)

  • Number of times an individual missed or paid late on a loan or a card other than the one for which they were calling (fewer is better)


Endnotes

1 www.house.gov/financialservices/110101ds.pdf, U.S. House of Representatives, Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit. Testimony of Dolores Smith, Director, Division of Consumer and Community Affairs, Board of Governors of Federal Reserve System. Smith estimated the total revolving debt at year-end 2000 to be $675 billion. According to Stephen Brobeck, PhD, author of several reports on credit card debt (cited below), about 15% of reported Federal Reserve Board revolving debt is paid off before incurring interest, reducing the revolving debt on which interest is accrued to $574 billion.

2 Since credit card deregulation and elimination of state usury ceilings by Congress in 1980 and 1982, the use of revolving, open-end credit has skyrocketed. The formula used to arrive at this number is ($574 billion in revolving debt)/[(105.5 million households)(55% carrying balances)] = $9,888 per household. The debt number in the formula comes from footnote 1; the number of households comes from the U.S. Census at http://quickfacts.census.gov/qfd/states/00000.html; the percentage of households carrying a balance is based on an interview with Stephen Brobeck, Executive Director of Consumer Federation of America, on March 14, 2002. Brobeck is author of numerous reports on credit card debt. Brobeck estimates revolving debt at $10-12,000 household, so our results ($9,888 or approximately $10,000) compare favorably with his. Total revolving debt (including the current month) has increased each year since 1980 ($55 billion) and throughout the 1990s-1990 ($238 billion), 1995 ($443 billion), 2000 ($663 billion) to the Fed's 2001 year end figure of $675 billion. (See Table 1190, Statistical Abstract of the United States for 2001, http://www.census.gov/statab/www).
For a detailed discussion of the relationship between average household revolving debt reported by the Federal Reserve (derived directly from bank data) and analysis of under-reporting by consumers of their estimated individual debt loads in surveys such as the Fed's Survey of Consumer Finances, see The Consumer Impacts of Expanding Credit Card Debt, Stephen Brobeck, Consumer Federation of America, February 1997. Brobeck reports that "overall, households may under-report credit card debt by 50% or more."

3 At the end of the Fourth Quarter 2000, the Federal Reserve reported the average interest rate on all credit cards carrying balances to be 15.23% APR. Nationally, with annual compounding (simple interest) that works out to $87 billion [$574 billion x 1523% = $87 billion.] The amortized annual interest for a family making a "typical 2% of the balance due" monthly minimum payment on a $10,000 credit card balance is $1,461.23.
The most recently reported average credit card APR, for cards carrying balances, was 13.88% APR, 4Q 2001, in the Fed's G-19 release for 7 March 2002, available at http://www.federalreserve.gov/releases/g19/Current/.

4 http://www.cambridgeconsumerindex.com/about.asp. Cambridge Consumer Index is a monthly random telephone survey of 1,000+ consumers. Its March 7, 2002 report estimated that 60% of families carry credit card balances. Brobeck (supra, FN 2) estimates 55% of households carry balances. U.S. PIRG estimates that typical minimum payments are 2% or $20.

5 See testimony of Edmund Mierzwinski, U.S. PIRG, before the House Committee on Financial Services, 1November 2001, http://www.pirg.org/consumer/credit/creditcards1nov.htm.

6 ftp://ftp.ny.frb.org/prime/Prime.txt, Federal Reserve Bank of New York

7 For a detailed discussion of credit card interest rates, floors, and other credit card abuses, see testimony of Edmund Mierzwinski, U.S. PIRG, before the House Committee on Financial Services, 1November 2001, http://www.pirg.org/consumer/credit/creditcards1nov.htm.

8 http://www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf. Federal Reserve Bulletin, September, 2000, "Credit Cards: Use and Consumer Attitudes, 1970-2000" p. 629, chart. The survey asked consumers to respond to the statement that the "interest rates charged on credit cards are reasonable." 26% disagreed somewhat and 55% disagreed strongly, for a total of 81%.

If You Owe The Credit Card Company $5000, Here Are Two Ways To Save:

1. Deflate Your Rate By One-Third
SAVINGS WHEN YOU DEFLATE YOUR RATE FROM 16% APR TO 10.47% APR WHILE MAKING MONTHLY MINIMUM PAYMENT = 2% OF UNPAID BALANCE

       

Total Payments

Monthly Payment

APR

First yr Interest

Total Interest

Months

Years

2% of balance

16%

$770

$8,350

314

26.2

2% of balance

10.47%

$492

$3,368

206

17.2

Savings

 

$278

$4,983

108

9

2. Increase Your Monthly Payment
SAVINGS WHEN YOU INCREASE YOUR MONTHLY PAYMENT FROM 2% OF YOUR BALANCE TO 10% OF YOUR BALANCE: SAME 16% APR

 

Total Payments

Monthly Payment

APR

First yr Interest

Total Interest

Months

Years

2% of balance

16%

$770

$8,350

314

26.2

10% of balance

16%

$507

$743

46

3.8

Savings

 

$263

$7,607

268

22.4

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