If you're struggling every month to pay down your credit card balance, you may suffer from sticker shock when you see that all of your efforts are making only a very small dent in the principal. If you have a high-interest card, a lot of the money you pay toward the debt beast each month goes directly into the company's pocket in the form of interest, and does little to help you pay down your debt. Both reducing your credit card's interest rate and increasing your monthly payments can help you get out from under debt more quickly.
Interest Rate Savings
There's no specific number you'll save with a lower interest rate. Instead, your savings depend on the total amount you owe on your card, how much your interest rate is reduced and how much you pay per month. You can multiply the interest rate reduction by your outstanding balance to estimate your annual savings. For example, if you owe $3000 and can get your rate lowered from 17% to 12%, you will save approximately 5% of $3000 in a year, or $150. (This is only an approximation because you will also be paying down the balance, so it won't be exactly $3000 for the entire year.)
The higher your balance is, the more money you will save. If you pay more than the minimum payment each month, you'll also save more because the interest rate is multiplied by the balance you owe -- the less you owe, the less you'll spend on interest payments.
Lower Monthly Payments
If you can only afford to make minimum payments, a lower interest rate can still help you save money. Your minimum monthly payments are calculated based upon your total debt and your interest rate, so a lower interest rate will typically lower your monthly payments. Even if you only make the minimum payment, you'll pay off your balance more quickly because the amount of interest that's being steadily added to your debt will be lower.
If you're serious about paying down your credit cards, a lower interest rate can make it much easier to pay them off. Each month, interest is tacked onto your credit card bill, and this makes it much harder to pay off the balance. Let's say you're paying $100 in interest each month and can afford to pay $200 to the credit card company. This pays down your balance at a rate of $100 every month. If you can get the interest rate reduced so that you're only paying $50 in interest each month, your same $200 payment reduces the balance by $150.
Lowering Interest Rate
Some credit card companies will lower your interest rate if you request that they do so or say that you're going to switch to a new card company. Your interest rate is partially determined by your credit score, so if you have a good credit rating, try contacting your card company and mentioning this, then asking for a lower interest rate. Many credit cards offer 0 percent introductory interest rates for the first six to eighteen months. Consider transferring your balance to one of these cards if you are confident you'll be able to pay off the entire balance before the introductory offer expires.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.