CK Blog

It seems like a familiar refrain of people with debt, particularly of the credit card variety to emphasize their interest rate. It could be that it is 0% and talking about interest arbitrage or it could be 25% and that is the scourge keeping them in debt. Therefore, it follows that the advice goes, call your credit card company lots of times and ask them to reduce your interest rate or threaten to take your business elsewhere.

Now that is not bad advice in general, but that is only half the battle, how much are you throwing at that debt to get rid of it The amount of your payment matters a lot into the debt repayment equation. If you are only paying the minimum payment, which is often 2%, you will be paying off the debt for the next 30-50 year and that assumes you do not charge another dime for that entire period. Even a few bucks a month can make a big difference. Pretend for a moment that you manage to rack up $11,000 in credit card debt and are tagged with an interest rate of 25%. If you make only the minimum payment, you will probably be paying roughly $231 as your minimum payment at 2%. It will take you 235 months or 19 ½ years to repay the money back and cost you $43,181.95 in interest charges.

Yikes! Let us say you skip Starbucks twice a month and pay $240 instead. That cuts your repayment time down to 151 months or 12 ½ years and would cost you $25060.03 in interest. You reduce your repayment period by 7 years and save $18,121.92 in interest. If you got crazy and found an extra $100 every month for that bill, you would reduce your repayment time to 4.8 years or 58 months. The cost of borrowing your original $11,000 is now only $7,923.37 in interest charges. If you did go back to the original idea of calling to get your interest rates reduced or moving the balance to a new card with a lower interest rate, you can still save a bundle in charges. By using the same example if you had a 14% interest rate instead of 25%, the same extra $100 would mean you could repay the bill in just over 4 years or 49 months with $3438.20 spent in interest charges. That is $4,485.17 saved if you can do a little shopping or negotiation.

After a certain point, lowering your interest rate will only make so much difference, even if you could get yourself a 0% rate for life on your balance, you still owe $11,000 and how fast that goes away depends on how much you are willing and able to devote to getting rid of it. How much are you willing to cut and sacrifices for a little while to get your debt paid off?

This entry was posted on Monday, March 26th, 2007 at 2:22 pm and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.