For Credit Card Debt Reduction, Interest Rates Really Matter

Many people focus their attention on how much they owe on their credit cards, but the total balance owed on credit cards only tells part of the financial story. Examine the interest rates on your accounts that have balances. Are any in the teens or twenties? If so, this is a vital target area. There are much better deals to be had - you just need to know where to look.

One of the best things you can do is to add up your total minimum payments and total finance charges for all the credit cards you have. The minimum payments minus finance charges gives the actual amount your balance is reduced by each month. If your credit cards have high interest rates, you'll be paying a lot in finance charges.

This means that most of the minimum payment you make every month goes to those finance charges, and your balance only comes down by a few dollars a month! By lowering your interest rate, you'll reduce the finance charges added to your balance. More of your minimum payment will be applied to the balance, which will lower it faster.

Let's look at an example for a $10,000 balance for two different interest rates. We'll assume a $200 payment throughout the life of the balance, which will be the initial minimum payment at two percent of the balance.

18% interest rate: About 94 monthly payments
10% interest rate: About 65 monthly payments

By reducing the interest rate from 18% to 10% and paying a steady $200 each month, the payoff period is cut by almost 2.5 years!

Read the Fine Print

Before transferring balances to a different account, examine the terms of the transfer. Most special offers have an expiration date. Make sure you're well in advance of that date on any offers you decide to use, or else you may be stuck with a higher rate if your transfer request occurs past the expiration date.

There may be a charge on each account you transfer. Avoid offers with fees based on a percentage of the transferred amount unless there's a maximum amount you can be charged. Some lower-rate offers will charge a flat fee per transfer. Here are two examples:

A three percent transfer charge
$5000 balance x 3% = $150

Flat Fees:
Two $2500 balances x $50 flat fee per transfer = $100

From your calculations of what you owe on your credit cards and the interest and finance charges you're paying, you can figure out how many accounts and how much money you need to transfer. Based on the type of offer you are considering, you'll then be able to calculate the fees.

The Internet is a wonderful resource for helping decide your best course of action. If you don't have a computer, a trip to the library is well worth the time. Many financial Web sites have calculators where you can enter different combinations of balances and interest rates to see how lower rates affect the payment amount. Evaluate the special offers to see exactly how transferring balances will help your situation and how much you can save on finance charges every month. You'll be glad you did, and you'll have more financial freedom.