Deflate Your Rate: How To Lower Your Credit Card APR

3/28/2002

Executive Summary

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.

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)