All cards can be classified as either fixed or variable rate. Fixed rate means the interest rate never changes—at least, in theory (more on this later). The rate on variable-rate cards, however, can go up or down, depending on the prime rate. Variable rate cards have become much more prevalent in recent years. In 2006, 86% of all credit cards were variable rate, while five years earlier, fixed-rate cards were more widespread than variable rate cards.

The rates of most variable cards mirror the prime rate. If the prime rate increases .25%, the rate on the card also increases .25%, typically by the next billing cycle.

Almost all variable-rate cards in the United States are tied to the prime rate, but it’s only one index issuers use to decide on rates. A few cards are tied to the London Interbank Offered Rate (LIBOR), the rate banks pay when they borrow money from each other in England. (The LIBOR is usually lower than the prime rate.) A few cards are tied to other indices, such as Treasury Bills. The index should be disclosed in the Schumer Box, but because it’s usually the prime rate, we will use that going forward.

Although lenders start with the prime rate, very few cards have rates at or below prime. Lenders determine the actual rate of a variable rate card by adding the spread, a certain number of percentage points or “basis points,” to the prime rate. For example, under “Variable Rate Information,” a Schumer Box might say “Prime + 6%,” meaning that the rate is determined by adding the prime rate plus a spread of 6%. Add the prime rate of 5% (at the printing of this book) to the spread, and you’ll find out that the effective interest rate is 11% (5% + 6%). It’s simple math.

Early on in tracking the card industry, I discovered there are invariably exceptions to every rule, particularly with regard to interest rates.

One notable exception is called a floor, which is a minimum rate that goes into effect if the prime rate drops below a certain level. For example, let’s assume the rate on your card is “Prime + 4%,” with a floor of 10%. Consider the current prime rate of 5%, your card would still have a 10% APR. No 9% (5% + 4%) for you because of the card’s 10% floor.

Until recently, only a few cards had rate floors, particularly cards targeted to consumers with bad or no credit. Now, more cards are using rate floors to avoid having to pass on all of the Fed interest rate cuts that we’ve recently witnessed. According to Linda Sherry, Director of National Priorities for Consumer Action, a national nonprofit education and advocacy organization, rate floors can also be associated with default and cash advance APRs (more on these APRs shortly). Sherry points out that the “never lower than” rates for penalty and cash advance APRs are always very high.

Some card issuers reserve the right to change the terms and conditions, including the APR, for virtually any reason...at any time. The controversial universal default clause referenced in Chapter 1 is one way card issuers justify such changes.

To make matters worse, depending on the circumstances, card issuers might not be required to even give you advance written notice of rate hikes. Even if advance notice is required, it’s typically as little as 15 days, and consumers often mistake such notices as being junk mail.

As a safeguard, carefully check your statement every month to see if any changes have been made to your interest rate. As Consumer Action’s Linda Sherry points out, if your card company raises your rate and you overlook this change, the mere act of charging something can constitute your agreement to the increase.

The worst part of such rate hikes is that in every instance, the increase affects not only current and future purchases, but also your outstanding balance. Translation: The increase is retroactive. Your past purchases are subject to the new rate, even though your card had a lower rate when you made them.

If this practice seems unfair, it is! If you’re a victim of such a rate hike, I urge you to complain to the issuer, your legislators, and your favorite consumer protection groups. For a list of my favorite groups, visit CardRatings.com/Book. Also take a few minutes and write about your experience in the popular “Consumer Reviews” section of my site. You’ll give a heads-up to other cardholders and create some negative publicity.

Fortunately, many issuers allow you to opt out of rate increases. You normally have to respond in writing, stating that you want to retain your current interest rate. One major drawback of opting out, though, is that your account is normally closed immediately or soon after you write to opt out. You won’t be able to use the card for any future purchases, but you won’t have to pay the higher rate on what you owed. Unfortunately, as of this writing, no federal law guarantees that a card issuer must give you the right to opt out.

If opting out doesn’t appeal to you, your other recourse is to transfer your card balance to a lower-rate card. This is often a much better option. You’ll pay a lower rate, which will save you money, and you won’t have to worry about losing your charging privileges.

The wife of Hdporter, a senior member of the CardRatings.com forum, benefited from paying attention to a change of terms notice:

Although the likelihood that a card issuer would attempt such a stunt might seem a little far-fetched, I have no reason to doubt such a claim. Exceptions to the rules always arise. Be vigilant, folks—power to the people!

Most balance transfers have fixed rates that actually stay fixed—as long as you pay on time and don’t exceed your credit line. If you move a credit card balance from, say, a 13% card to one that offers 0% balance transfers, you don’t have to pay a penny in interest, usually as long as you’re never late or you don’t exceed your credit limit.

Over the many years that I’ve been taking advantage of balance transfers, I’ve never experienced a rate increase. A few members of the CardRatings.com credit forum haven’t been as lucky as me, but the vast majority of consumers I come into contact with report very favorable experiences with balance transfer rates. More on this money-saving topic soon.

Table 3.1 explains the various interest rates that might appear on your credit card bill.

Now that you know some of the nuances of credit card rates, let’s focus on what you’re most concerned about: how to pay as little interest as possible. According to the Federal Reserve, only about 40% of cardholders said they paid their credit card balance in full every month in 2004 (the most recent year for which figures are available). If you carry a balance, the best way for you to get the most from your credit cards is to find one(s) with as low a rate as possible. The money you save will be your own.

The current average interest rate is around 13%. That might sound like a high rate, but bear in mind that the average interest rate 15 years ago was around 20%. The good news is that several card offers advertise rates below 10%—any rate below 10% is generally considered an attractive rate.

But are the savings really all that much if you have a low-rate card? Absolutely! Take a look at this example of how much you can save by lowering your interest rate:

Let’s say you have a $2,500 balance on your card, and although you make only the required 2.5% minimum payments, you don’t add any new charges to the card. With an 18% APR, you’d shell out $3,366 in interest by the time you pay off the card—some 20 years from now!

Lower that interest rate to 13%, and you’d pay $1,733 in interest—a 48.5% savings over the 18% APR offer—and you’d reduce the term to a little more than 15 years. Where else can you save 48.5%? Certainly not at the bank or on Wall Street.

But wait: If you can qualify for a 9% APR, you’d pay only $977 in interest over 12.6 years. That’s an incredible 71% savings over the 18% card. Wall Street tycoons would be thrilled with such a return on an investment. But in this case, nothing is invested and no risk is involved. You don’t have capital gains or other taxes to worry about. Your savings are tax-free and guaranteed.

For an even better return, send in the first month’s required payment of $62.50 every month until the entire balance is paid off. You’d save another $494 and shave off almost nine years of payments. Your total interest savings over the 18% card would be $2,882—more than you owed in the first place!

Table 3.2 shows how much you would save in these different scenarios.

Let’s say you owe $10,000 on an 18% card with a 2% minimum payment, and you’d love to be out of debt in five years when you expect to retire or start paying college bills. Only sending in the required minimums is certainly out because it would take 57 years. Your total costs would be $38,931. (The lower the minimum, the higher your potential costs. We’ll talk more about this in Chapter 5, “How to Slash Your Debt and Keep Your Hard-Earned Money for Yourself.”)

Now look what happens if you get a lower-rate card and then consistently send in the same amount every month to pay off that $10,000 in five years. If you qualify for a 13% card, send in $228 a month—you’ll save $25,279, which is enough to pay for a year at many colleges. With a 9% card, it would take $208 a month to be debt-free at the end of five years. Addition to your nest egg: $26,476.

Although low rates can be incredibly beneficial, getting credit cards with rock-bottom rates can be a challenge. The people who get the lowest rates have solid credit scores, generally in the 720 range. (See Chapter 9, “Your Credit Report and Score: The Better You Look, the More You Profit,” for more about credit scores, including ways to improve your credit score.)

If you do have good to excellent credit, then you’re in the driver’s seat, but most cardholders can find great deals. According to credit expert Gerri Detweiler, author of Invest in Yourself: Six Secrets to a Rich Life (Wiley, 2001), you can use several different avenues of approach to obtain a lower rate, and it’s worth trying them all:

When you’ve taken a gander at the current rates being offered, you can use them as a negotiating tool with your card issuer. Trying to bargain down your rate might sound like an intimidating, complex process, but it’s actually quite simple and can be very empowering as it saves you money. Believe it or not, many consumers have saved hundreds and even thousands of dollars by simply making a five minute phone call and asking their issuer for a lower rate.

Unless you already have a great rate, it’s definitely worth calling your lender to see if you can get a better deal. I’ve done this myself many times over the years, so I know that it works. However, your chances of succeeding are significantly diminished if you have a poor credit rating or you haven’t used your card responsibly (for example, you’ve had more than one late payment in the past year or you exceed your credit line on a regular basis).

Here are five tips to increase your chances of getting a lower rate when you talk to a customer service rep:

Talking to a supervisor is often worth it because the customer service reps are more limited in their ability to make account changes. If the supervisor can’t help, your next step should be to threaten to stop using the card and to transfer your balance elsewhere. When you call their bluff, you’ll probably be transferred to the account retention department. Its sole purpose is to keep customers (hence the name), so this department can often give significant concessions to make you happy.

Although the lender isn’t totally at your mercy, you have a good chance of achieving positive results if you follow these tips. Just be realistic about your expectations. If your current rate is 21%, for example, don’t expect your issuer to instantly lower you to 6.9%.

It’s fairly common for an issuer to lower a rate by a few percentage points, but some members of the CardRatings.com forum have achieved dramatic results. Jevon McAlister, a regular poster from Brooklyn, New York, was able to lower the rate on his Chase MasterCard from 21.99% to 11.45%. That’s more than 10% from one phone call. Where can you earn that guaranteed rate of return today?

This was McAlister’s first credit card, and he’d made on-time payments for 21 months before he made the call. His approach was very straightforward:

I hope that McAlister’s two toll-free calls, which together saved him a whopping 13%, inspire you to take the initiative.

Expect a positive outcome, but if your efforts don’t result in even a small rate decrease, I suggest you follow through with the threat you made to the supervisor. Look for an attractive balance transfer offer from another card.

If your card issuer uses the average daily balance method to calculate interest (most do), make your payments before the due date to reduce the interest bite. According to Nancy Castleman, cofounder of GoodAdvicePress.com, lenders are required to credit payments when they’re received, so the earlier you pay your credit card bills, the lower the average daily balance will be. The less you owe, the more you’ll save in interest. Bottom line: To save the most, pay as early as you can—and as often as you can, for that matter.

With any card, particularly a low-rate card, make sure you always do the following:

Otherwise, you might end up getting hit with a default (aka penalty) rate, which is normally much higher and can be over 30%. Ouch!

You should know the default rate of your current cards and any cards that you’re considering. (Check the Schumer Box.) Perhaps more important, pay attention to what can trigger the default rate.

Especially if you can’t trust yourself to follow my tips to avoid a rate hike, look for the lowest default rate you can find. Some smaller card issuers, such as Simmons First National Bank in Arkansas, offer default rates in the midteens, while the average default rate in 2007 was 24.51% according to Consumer Action.

Finding out what triggers the default rate can be a challenging proposition because this information is not normally adequately disclosed. Fortunately, you can easily research default rate triggers by perusing the New York Banking Department’s quarterly online credit card survey. (I’m proud to say that CardRatings.com compiles the data for this survey. Visit CardRatings.com/Book for the direct link.)

One worst-case scenario should encourage everyone to pay their bills on time: Some lenders charge a default rate if you’re one day late making one payment. Other issuers institute a penalty rate if your monthly minimum payments are late twice during any portion of a 12-month period. Exceeding your credit limit is also a common default pricing trigger.

Finally, those late payments with other creditors or even late payments to utility companies can result in default pricing. That controversial universal default clause can cost you money here, too, as can that lovely phrase, “anytime for any reason.” That’s where issuers can raise your rate strictly based on information in your credit report or a change in your credit score (more on this practice later).

Already paying a default rate? Find out what you have to do to get your account changed to a lower rate. Some lenders require you to make 6 or 12 consecutive on-time payments before the rate returns to the normal purchase APR. But the policies vary greatly.

Every time you apply for a new account, your credit score usually drops a few points. As a general rule, I recommend that you don’t apply for more than one new account every 6 to 12 months.

A similar question that I’m frequently asked is, “How does taking advantage of multiple balance transfers affect my credit rating?” Viewpoints on this vary from “Risky” because of all the open credit accounts that it produces, to “It really doesn’t change things much.” The general consensus among experts is that your credit rating will not be adversely affected...as long as you do not do so excessively. In fact, some experts, including myself, maintain that “balance transferring” can actually improve your credit rating, at least in some instances.

More important, be careful not to use most of the credit limit on any of your cards (commonly called maxing out a card). Doing so really causes your credit rating to suffer. Ideally, you want to use only 10% or less of your credit limit. The higher your utilization, the more your score will suffer.

Finally, never make a late payment—never! Not only will this affect your credit score (generally when you are 30 days or more late), but as I’ve already showed, just one late payment could raise your low rate to exorbitant levels. And if you have more than one card, that single late payment can have a domino effect, with your other cards hiking up your rates. More details on credit scoring come in Chapter 9.

Marketing departments are in the business of making the most enticing details jump out at you, distracting your attention from the less attractive parts of the offer: the details usually listed in the fine print. Educate yourself about all the terms before you sign on. If the fine print seems too daunting to comb through, give the bank a call and ask about the terms. The “Card Reports” section of CardRatings.com also tries to translate hard-to-understand terms into simple English.

So what should you look for? For starters, see what the introductory rate is, how long it lasts, and what the rate will be after the introductory period. Is there a balance transfer fee? (There usually is.) If so, what’s the fee and how is it calculated?

Always find out if new purchases have a different rate than balance transfers. On cards being marketed to entice us to move our debts around, new purchases usually have a much higher rate. If so, follow this cardinal rule of balance transferring: Don’t use this card for new purchases.

Lenders typically apply your payments first to the lower-interest debt—that is, to your transferred balance. This means that, until the balance transfer has been paid off, none of your payments are applied to your new purchases, which are being billed at a much higher rate. That can quickly wipe out any potential interest savings. As I write, Congress is considering legislation that will require card issuers to credit payments against the highest interest rate. Here’s hoping!

If you use cards only for the reason you chose to have them in your wallet, you’ll be in great shape. Simply put, use low-rate balance transfer offers strictly for balance transfers, and use cards that have as low a rate as possible for new purchases. Pay them off as quickly as you can, and you’ll get to keep a lot more of your hard-earned dollars.

To get the most from the current crop of balance transfer offers, there’s no avoiding it—you have to do the math. The good news is that the math is pretty simple. With transfer fees on the rise, it’s important to take them into account. Here’s how: Let’s say you’re considering a 12-month 3.99% transfer offer with a balance transfer fee of 4% (no cap on the fee). Add the rates, and you’ll see that this is really the equivalent of a 7.99% purchase rate (3.99% + 4%), assuming that you pay off the transfer in one year. You’d want to take advantage of the offer only to transfer balances at rates that are greater than 7.99%.

Paying a fee for a balance transfer might be a good financial decision if it will result in interest savings. Of course, try to avoid fees, if at all possible. The bad news is that no-fee offers are becoming increasingly harder to find.

If you’re considering an offer with fees, try to always find one that has a maximum fee (aka a fee cap). Issuers are required to disclose whether an offer has a maximum fee. It’s usually located in or just below the Schumer Box. Maximum fees are generally in the range of $75 to $200. Obviously, the lower the cap, the greater your potential savings. Sometimes banks will eliminate or reduce the fees if you ask. It certainly doesn’t hurt to try.

Scott Bilker says consumers make a “major mistake” by not tracking when a low-rate offer ends and then letting their debt ride at a much higher interest rate. Mark your calendar with the beginning and ending dates of teaser rates. Then you can guard against a higher interest rate either by paying off your debt before the intro period ends or by transferring the balance again.

Although they might not be as attractive on the surface as a 0% piece of plastic, don’t rule out cards where the rate, usually in the 3.99%–6.99% range, remains in effect for the life of the transfer. This would mean that even if it takes you ten years or more to pay off your balance, your rate would not increase. These offers aren’t nearly as widespread as introductory rate offers, but they’re out there and are definitely worth considering.

For example, I was able to take advantage of a great offer from Capital One that was 1.99% for the life of the transfer. I used the proceeds to partially finance the purchase of a condo that my wife and I are using for investment purposes. (Right now, we’re renting it out.) We were offered a mortgage of around 7%, but graciously declined. Compared to a mortgage, we will likely have saved thousands of dollars by the time we finish paying off the balance—even despite the fact that we won’t get a tax deduction on our credit card interest like we would have gotten had we opted for a mortgage.

Pursue this type of offer if it will take you more than 6 to 12 months to pay down your debt—and if you don’t want the risk associated with looking for another transfer offer after the current teaser rate expires. Bear in mind that although attractive transfer offers have been plentiful for many years, there’s no guarantee that an attractive offer will present itself 12 months down the road. The beauty of these “life of the transfer” offers is that they allow you to lock in at a great rate for the long haul.