Dear Debt Adviser,
We owe $5,417 on a credit card at 16.99 percent interest. The monthly payment is $107. I contacted the company to ask for a lower rate, as we are having some financial problems. They said we can get a 9.99 percent interest rate for one year, and then it will go back up to 16.99 percent. We cannot use the card during the time of the reduced interest rate. We have one month to decide if we want to do this. Should we?
-- Richard
Dear Richard,
Good for you! Negotiating a lower interest rate on your credit card balance with your creditor can be an uncomfortable thing for most people to do. But you have shown that if you try, it can be done successfully. I am glad you wrote for many reasons, one of which is my readers now have a real live example that creditors are willing to make concessions when consumers who are in need request them.
I'm sure you understand the reasoning behind your creditor suspending your charging privileges while the interest rate on your balance is reduced. They want you to stop charging because you have said you cannot afford to make your current payments. Therefore, adding to your balance will make the situation worse, not better.
Debt Adviser's Quick Tips
- Consider all your debts when negotiating with a creditor.
- Determine how much relief a rate reduction will provide.
- Credit counseling is an option.
The question in my mind, and I think in yours as well, is this: Will this concession make a real difference, or is it just moving the deck chairs around on the Titanic?
The first thing you must figure out before you make the decision of whether to accept your creditor's deal is to decide whether you can stop charging -- on all your card accounts, not just this one. I hope you'll look at all your credit cards as well as your spending habits when making this determination. If you are adding to your credit balances each month, you need to make the necessary adjustments in your expenses to stop. Period.
The lower interest rate is not going to affect your monthly minimum payment significantly. More of your payment will go toward the principal balance with the lower interest rate (which you want), but after the 12 months at the 9.99 interest rate your minimum payment will only decrease to $95. (I found this payment by rounding to 10 percent interest using Bankrate's credit card calculator.) When your one-year concession has elapsed, you will still owe approximately $4,700 if you make only the minimum payment due. Taking advantage of the lowered interest rate does make sense, but I'm not sure if it will really make enough of a difference in your situation.
Still, it has been my experience that you never know what may happen in a year. Your financial situation could improve a great deal allowing you to be able to make larger monthly payments on your credit card to get it paid off. Or, your financial situation could be the same or worse in a year. Ideally, you can make the necessary adjustments to be in a position to pay off the remainder of your debt (the $4,700) in three years or less. You would need to make a regular payment of $175 per month to reach that goal.
Should the card you are writing about be only one of many, or if you need some help determining how to make adjustments to your expenses, you might consider contacting a nonprofit credit counseling agency. Your certified counselor will help you with your budget. Depending on your circumstances, you may want to consider a debt management plan to get your debt paid down as quickly as possible. To find a reputable agency, see the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
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