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Lower your credit card rate
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November 2, 2001: 3:25 p.m. ET
Credit card holders find it hard to latch onto the interest-rate freefall.
By Sarah Max
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NEW YORK (CNNmoney) - Although credit card rates have come down with Alan Greenspan's string of interest-rate cuts, issuers are far more sensitive to credit risk than they were in years past. And for good reason.
The nation's collective credit card balance is now $600 billion, twice what it was in 1994. According to a recent survey from the American Bankers Association, credit card delinquencies in the second quarter of this year were the highest the association has seen since it began tracking delinquencies 21 years ago.
"I don't think there is any doubt that credit standards are tougher at this point than they were a year ago," said Greg McBride, a financial analyst with Bankrate.com. "The very best rates only go to the very best credit profiles."
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While more conscious of risk, issuers are still aggressively courting new customers. In fact, teaser rates and balance-transfer rates are the lowest they've ever been. "You can get zero percent rates that last as long as a year," said Robert McKinley, CEO of CardWeb.com. "We've never seen anything like this before."
If you carry a balance, you should by all means use this low-rate environment to lower your finance charges and trim your debt. But rather than blindly shop for the lowest rates, consider your credit history and search accordingly. "You have to be realistic about your credit," McKinley said. "If your credit is spotty, don't waste your time applying for a 9 percent rate."
Shop around, but with care
With most goods and services, your chance of finding the best deal is directly related to how much time you spend shopping around. This is not exactly the case with credit cards. Technology has made it easy for credit-card issuers to customize rates according to each applicant's personal credit history. In fact, according to Consumer Action, a non-profit consumer advocacy group, one-third of issuers tweak rates according to credit risk.
As a result, many consumers are overlooking such fuzzy language as "your rate can be as low as" and signing up for cards that carry higher rates than promised in bold print. (Consider this an extra incentive to actually read your card's terms.)
Because of these customized rates, you can't always know what your rate will be until you actually apply for the card. "More and more companies are unwilling to promise a rate until they've checked your credit," said Linda Sherry, a spokesperson for Consumer Action.
Now that most of the major credit card companies offer instant credit approval online, you can get results pretty quickly. Problem is, every inquiry shows up on your credit report. The more inquiries you make, the more risk you represent for creditors. "If you apply to too many cards, it may raise red flags to lenders," Bankrate's McBride said. This can be particularly troublesome if you plan on applying for a mortgage or any other major loan any time soon.
In addition to actually getting a copy of your credit report, look at whether you are close to your credit limit or have a history of paying your bill after the due date. Either of these may preclude getting the best rate. You might also save yourself some trouble by first asking your current issuer to make you a better offer. "I advocate staying with a company you like and trying to get them to be nicer to you," Sherry said.
How low can you go?
Variable-rate credit cards, which are tied to the prime rate, have fallen along with other rates. Their average interest hovers around 13.8 percent, down from 17.1 percent early this year. More cuts to the Federal funds rate could bring these rates down even more, though some cards will run into interest-rate floors, if they haven't already. The so-called minimum annual percentage rate (APR) on the General Motors MasterCard, for example, has kept its variable rate from going any lower than 16.9 percent.
Fixed-rate cards, which account for half of all cards, have not been so quick to follow the Fed's lead. On average, they levy a 14.2 percent rate, verses 15.5 percent at the start of the year. "Many of those fixed-rate cards haven't moved at all this year," CardWeb's McKinley said.
If your credit is decent, strive for a rate that is better than average. Both CardWeb.com and Bankrate.com have tools for searching for credit card bargains.
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While you're shopping for the lowest rates, you may notice the best offers come from small banks with unfamiliar names. Arkansas' Pulaski Bank & Trust, for example, has gotten lots of kudos over the past several years for its 6.5 percent annual rate.
Unfortunately, your chances of qualifying for Pulaski's card, or any small bank's card, are slim. "Pulaski only has 32,000 accounts and is only adding 1,000 new accounts a month," McKinley said. "About one in 100 applicants will qualify for it."
Even if you do beat the odds and qualify, don't expect to transfer big balances and shop like Imelda Marcos. The average credit limit for Pulaski cardholders is about $1,600.
You're more likely to qualify for the better rates and bigger credit limits if you focus on the largest issuers, such as Bank of America, Bank One/First USA, Capital One, Citibank and MBNA. Although 9 percent is about as low as they go, they don't limit their best offers to just the very best applicants and they are willing to take on larger balances. "If you're looking to transfer a $5,000 balance, you need to look to the largest issuers," McKinley said.
Perks don't come cheap
If getting the lowest rate is your first priority, you'll probably want to pass on cards that promise cash back or free flights, as most come with pretty steep interest rates and annual fees. United Airlines Mileage Plus card from First USA, for example, charges a $60 annual fee and levies a 16.4 percent variable rate, while the American Airlines Citibank AAdvantage card costs $50 a year and charges 16.65 percent interest. Even if you charge enough to regularly earn free tickets, you'll pay for those flights with extra finance charges if you carry a sizable balance.
"One place cards have additional perks, but are not disadvantageous, is with platinum cards versus standard cards," Bankrate.com's McBride said. Indeed, rates do not vary greatly between standard, gold, platinum and titanium cards.
For a limited time
Now that teaser rates and balance-transfer rates have come down dramatically, you may want to actually read through the credit card solicitations that show up in your mailbox.
Teaser rates are particularly attractive if the introductory rates are good for six months or longer. In the past, teaser rates only lasted a month or two before the higher rate kicked in. The best balance-transfer offers are those with the lowest rates (obviously) and no fees attached.
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As always, teasers and transfers should be used with care. Issuers often charge a fee for balance transfers, and introductory rates usually come with the caveat that if you don't pay on time, the deal is off. In fact, according to a Consumer Action survey of 45 credit card companies, 69 percent of issuers will raise your interest if you pay late. Consider First USA's National Geographic MasterCard. It promises a zero percent rate for six months if you transfer a balance. If you're late once, however, that rate shoots up to 13.7 percent. Pay late twice in six month's time, and your rate soars to 20 percent.
Don't give yourself too much credit
If opening a new card only frees you up for more charging, you've accomplished nothing. Once you do find a better deal, cut up your old card and make a point of canceling it in writing. "Shifting debt from one card to another can get you in trouble if you just accrue more debt," said Stephen Brobeck, executive director of the Consumer Federation of America.
If you move from one credit card to the next without officially breaking up with your former issuer, you could also damage your credit profile. When lenders estimate the kind of risk you pose to them, they don't just look at your balances. The look at how much credit you have at your disposal. Even if you haven't used a card in years, it is factored into the equation if the account is not closed. "You may have to contact the issuer two or three times, but keep plugging away until your credit report shows that the card has been closed," Consumer Action's Sherry said. 
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