Financial Privacy & Security News

More than half of consumers who called their credit card company to complain about their high annual interest rates were successful in reducing those rates by an average of one-third, according to a report by the Massachusetts Public Interest Research Group (MASSPIRG) released at a press conference today. Such reductions could generate thousands of dollars in savings for individual consumers on their credit card bills and billions of dollars nationally. The MASSPIRG report, "Deflate Your Rate: How to Reduce Your Credit Card APR," also found that consumers with good credit ratings who had been with their current credit card company the longest had the most success.

"Deflating your rate by one-third can save hundreds of dollars per year and thousands of dollars over time in reduced interest payments," said Bradley Dakake, Consumer Advocate for MASSPIRG and author of the report. "Make the call today and start saving tomorrow. Nationally, the potential savings are staggering."

In 2000, American households carried revolving credit card debt—balances that are rolled over each month—of $574 billion. According to the Federal Reserve, the average household carrying credit card debt was buried beneath approximately $10,000 in total credit card debt. A household making the monthly minimum required 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. The study found national interest paid on the average household credit card debt totaled $87 billion in just the first year.

"MASSPIRG's study shows consumers an inexpensive, safe, and effective way get a grip on high credit card debt—negotiate to lower interest rate and payments," commented Chi Chi Wu of National Consumer Law Center. "MASSPIRG's study offers a sound alternative to the often-repeated and dubious advice telling consumer to pay off credit card debt by taking on more debt or taking the equity out of their homes."

Volunteers participating in the survey called their credit card companies, saying they would switch to another company unless given a lower APR. Key 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.
  
• Factors improving the caller's success rate included a longer length of time with a particular card, a low unpaid balance compared to credit limit (being less "maxed out"), and a history of no late payments.
  
• Despite eleven reductions by the Federal Reserve Board in the prime rate, or interest rate charged to banks, in the last year alone, banks and credit card companies have refused to pass along all of these savings to their customers, resulting in excess interest payments.

To maximize savings, the report suggests consumers call their credit card companies to lower their APR and that they pay off as much of their credit card debt as possible each month. A household that paid two percent of a $5,000 credit card balance could save up to $278 in interest in the first year and $4,982 in interest over time by reducing its credit card APR by one-third. That same household could increase its savings to $7,607 by increasing the size of its monthly payments from two percent of the balance to 10 percent.

"The best defense is a good offense," said Jennifer Davis Carey, Director of the State Office of Consumer Affairs and Business Regulations. "It is important to learn all of your options in order to have the best strategy for protecting your credit. The best consumers are those who are informed about their own credit, and the terms, policies, and conditions of institutions extending credit to them," she said.

MASSPIRG urges consumers to:

• Call their credit card company today and ask for a lower APR. (Remember, chances for an APR reduction are best if consumers have had the card for some time, are not maxed out or close to their credit limit, and do not make late payments.)
  
• Never pay just the minimum payment due; instead, consumers should always pay as much as they can afford. If individuals have more than one card, their biggest payments should be on the cards with the highest APRs. Making only the minimum payment is like running on a debt treadmill-the bank wins, and consumers lose.

Rachel Heller, one of the 50 consumers participating in the survey, and also present at the press conference, was able to cut her APR almost in half, from 15.9 percent to 8.65 percent. With a balance of $4,474 and making the minimum payments of two percent, Heller saved herself $324 in just the first year and $5,031 over the life of the debt. Because of her lower APR, she will also pay off her debt almost 10 years earlier.

"I never realized I could call my credit card company and get a lower rate just by threatening to switch companies," said Heller. "Everyone—and I mean everyone—should do this."

"Investing five minutes on the phone with your credit card company can save you hundreds—sometimes even thousands—of dollars," concluded Dakake. "That's a pretty good return."