The get-out-out debt double whammy starts by playing chicken with your bank

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by: jmwaldrep
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Word Count: 864
Date: Mon, 5 Apr 2010 Time: 5:01 AM
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You owe $8,000 on a credit card at 18% interest. If you make the minimum payment of about $200 a month it will take you over 26 years to pay it off and you will pay over $11,000 just in interest. Ouch. Take that same $8,000 balance but cut the interest rate to 9% and your minimum payment is now about $140 a month. That seems a lot better, right? Well, not much. Making the minimum payment it will still take you close to 25 years to pay that card off and you will end up paying a substantial $5,600 in interest.

But what if can lower your interest rate and take the $60 that you saved and apply it to your monthly payment? Now you're paying $200 a month instead of the minimum of $140, but $60 is going directly towards principal. In this case it will take you 48 months to be rid of your debt and in that time you will only pay about $1,500 in interest.

Lowering your credit card interest rates and applying the "saved" money to your monthly payment is a great strategy to get out of debt.

With that in mind, if you have a have high interest credit card you should be laser beam focused on lowering your interest rate. As you have seen you will save money on your minimum payment which can be applied to a payment that will save you thousands of dollars in interest and years of monkey-on-your-back payments. While it may be clear to you that lowering that monster interest rate makes perfect sense, your bank or credit card company may decide not play along as nicely as you would hope.

If You Have Very Good Credit

Step one: Pick up the phone and call your bank. Be nice, but don't beat around the bush. Ask for a lower rate. How low? If you have good credit and have been a valuable customer (i.e. you pay on time) you should be able to get a rate of about 10% or less. If the customer service agent isn't helpful, ask for a supervisor. If that doesn't work trying calling back in a few days. Make it clear that as a loyal costumer you would hate to leave, but you will do just that if your loyalty isn't rewarded with a more reasonable interest rate. Finally, if your bank is not showing you the love, start checking on lower interest cards and transfer your balance(s). Start applying the money you saved to your monthly payment and what the balance disappear!

If You Have Fair Credit

You are not in as strong of a bargaining position, but step one (above) still applies. Pick up the phone and ask for a lower rate. If you don't have any luck start looking for any card that is even a couple of percentage points less than what you have now. If you get approved, call your bank and say that you are going to transfer your balance to xyz bank unless they can offer you a better rate. Shoot for another two (or more percentage points) lower than the new card. If they say no pull the trigger and keep looking for better deals. When you get one, take that extra money and apply it to your highest interest credit card.

If You Have Very Poor Credit

This is where it can get tough. As above, pick up the phone and ask for a better rate. If you don't get it ask what you can do to qualify for a better rate. You may want to explain that your present circumstances have put you in a position of financial hardship. If you have one credit card that has the combination of a very high interest rate (24-29%) and a high balance you may want to consider the last resort of not making a payment on that card for a few months and using that money to pay off and close a card with a smaller balance. Remember, any money you save anywhere should be applied to credit card so you are no longer making a minimum payment.

What's going to happen if you don't pay one card? Well, you'll get dinged further on your credit score, but if your credit is already a mess that may not be as big of concern to you. After missing a couple of payments you can go back to the bank (or wait for them to call you…don't worry they will) and tell them you just cannot afford that high interest and big monthly payment. They may or may not do something for you at that point. If you decide to stop paying that card all together (but stay current on everything else) your account will be turned over to a third party collection firm. At that point you may be able to negotiate a settlement with them. Often times they will offer one to you. Again, this is a last resort and a fairly desperate measure but one that may make the most sense in your situation.

About the Author

The author writes about free credit reports as well as information about credit cards, interest rates, debt reduction and other items of interest to consumers.