Credit card rates do matter

Q:  I am an Army spouse, and stay-at-home mom.  I have a credit card that I got before we were married, and used it a little too much.  The account is expired and no longer used.  I owe almost $6,000 on it and the interest rate is 29%.  With such a high interest rate, (and we struggle to pay the minimum payment now) should we consider credit counseling, where they try to reduce the interest and we pay them monthly instead of the creditor? I feel like otherwise we will never get it paid off.

Thank you for your help.

--Katie,  Honolulu, Hawaii

A:  Katie, I would recommend that you take advantage of financial counseling available on your installation or through an organization that is part of the National Federation of Credit Counseling (www.nfcc.org).  In my mind, this one account should not be enough to make or break your overall financial situation.  Is there more to the story?  Everything financial starts with a clear understanding of what comes in and what goes out…a budget.  With the help of a counselor you may be able to develop a budget which results in more money being available to service your debt.  Your counselor will also recommend that you contact the credit card company and determine if they are willing to reduce the interest rate, since you are determined to pay off the debt. 

 

Interest rates matter.  At the current interest rate of 29%, if you’re paying $200 per month, it’ll take you four and a half years to pay off the debt (that is if you don’t add to it!) and will cost a whopping 4,800 hard-earned dollars to pay off.  Ouch.  If you got aggressive and doubled your payment, you could wipe the slate clean in a year and a half at an interest cost of approximately $1,500.  Check this out: if you are able to lower your interest rate to 15% (which is reasonable in the current interest rate environment), a $200 per month payment will take 38 months to pay off with a cost right under $1600.  While a $400 per month payment will wipe out the debt in 18 months with a cost of $690.  Your credit card company may not be inclined to lower your rate right away, but once you get busy and start paying aggressively  and on time every time, they may consider it. Hey, you can’t get a “no” without asking!   

 

Buckle down, cut spending, live on a budget and make paying off that balance your 2009 mission.   You can do it.  And, don’t say “just charge it” anymore.