This just in – the Prime Rate has now been lowered to…

4.25%.

What does this mean?

If you have credit card debt and pay interest on it, it might mean an opportunity to lower your APR.

We’ve discussed the APR, which stands for annual percentage rate, in previous articles. It’s the rate of interest that is charged on a loan for a whole year.

When the APR on your credit card falls, you end up:

  •  Having to pay less interest on your credit card debt
  • Lower interest payments on a new credit card

Which means additional savings.

Reducing your APR

So how do you secure a lower APR?

On an existing card, you can always ask your bank to lower your APR. Now is the most opportune time to do so given that the prime rate, which is the interest rate at which banks lend to their most creditworthy corporate customers and a key determinant of APR, has decreased and, as seen on some credit card terms agreements (here is an example agreement from Bank of America), APRs can vary with the market based on the Prime Rate. We even suggest that you bring up this fact in your conversation with your bank’s customer support representative since it is an industry standard to reduce APRs when prime rates decrease. 

Alternatively, have us ask for you, where we have secured lower APRs for our users in the past, in some cases by as much as 1-2%.

However, do keep in mind that this APR will only apply to future interest payments and to your existing outstanding balance. What you’ve accrued in unpaid interest so far won’t get renegotiated and reduced.

You can certainly try to have some of your interest charges waived, which is something we specialize in and can certainly help you with. In some cases, our users have been able to get over hundreds of dollars back in waived interest charges.

Can’t lower your APR with your bank?

Take action and browse for banks that have lowered their APRs to reflect this reduction in the Prime Rate.

Once you’ve identified a card with a lower APR than the one you currently have with your bank, look into options for commencing a balance transfer, which is how you move credit card debt from one card to another. By doing so from a card with a higher APR to a card with a lower APR, you stand to save by paying lower monthly interest on your credit card debt.

For example, let’s say that you approach your bank for a lower APR on the basis of a reduced Prime Rate and get rejected. You then see that Discover now has a much lower standard APR range of 13.49%-24.49%. You apply for a balance transfer and get quoted an APR of 18%, which is lower than the 20% APR that you’re currently paying. Accounting for potential fees and introductory APR bonuses, it might make sense to transfer your credit card statement balance from your bank to Discover.

Other benefits to a lowered Prime Rate

Moving away from reducing your APR, how else can you take advantage of this lowered Prime Rate?

You can borrow money at a lower interest rate.

This, however, does not mean that now is the time to take out loans and finance reckless consumption. Never is there ever a time to take out bad debt, which we’ve previously defined as debt that cannot be sustainably serviced. In this context, debt that you know you might not be able to properly pay off should the Prime Rate rise (which would increase the interest rate on whatever loan you decide to take out). Just because debt is now cheaper to take out does not mean it is now a better idea to take out, especially if taking out debt now means subjecting yourself to a potential financial downside that you might not be able to afford should that downside become a reality. This goes for all kinds of assets, even ones that are conventionally considered to be appreciating and thus “productive” assets, such as real estate.

A quick primer on how to assess whether you’re ready to take on debt

Understandably, it’s not always clear whether you’re ready for debt. To judge whether you’re at a point at which taking out debt is financially feasible, we suggest that you plan for contingencies and assess whether the financial downside of each scenario might be acceptable.

For example, if your income is slightly higher than your expenses and you have funds to spare, and you now want to take out a mortgage to take advantage of falling rates, think about how you might cushion yourself from financial disaster should an extenuating circumstance arise that sets you back, say, a couple hundred dollars.   

But if you are in a position to take on debt, with interest rates falling due to a lowered Prime Rate, now does appear to be a good time to take on debt such as student loans for school, a mortgage for a home you’ve always wanted or refinancing of your existing home, a new car, etc.

A rule of thumb: if all it takes is an unforeseen circumstance to make your debt interest payments unaffordable, do not take out the debt.

To summarize, there’s a lot you can do with a lowered Prime Rate, from taking out a mortgage at a lower interest rate to paying less on your credit card through a reduced APR. But just because debt is currently cheap does not mean you should invite it into your financial life. Regardless of how cheap debt gets, at Harvest Platform, we will always stand by this rule: that if the debt that you are about to take on is only marginally serviceable and you can’t see yourself avoiding financial disaster in the event of an extenuating circumstance that increases your expenses, don’t take on the debt.