FINANCE: True ways to shrink credit card balance

How much money could be saved with a lower interest rate or increased monthly payments.

The amount you save by transferring your balance to a lower-rate card depends on your old and new interest rates and how much you pay each month. Lowering your interest rate and boosting your monthly payments could shave thousands of dollars off your bills and eliminate months, even decades, of repayments.


Credit card companies must now disclose on your monthly statement how long it will take to pay off your balance if you make only the minimum payment, as well as how much you'll pay in total interest over that time. Say you have a $5,000 balance at 18 percent interest and you make the minimum payment of 2 percent of the balance each month. It will take more than 39 years to pay off your balance, during which time you'll pay more than $13,000 in interest.


"It's so long, some people think it's a mathematical error," says John Ulzheimer, president of consumer education for SmartCredit.com.


One reason it takes so long to pay off the balance is that minimum payments are generally calculated as a percentage of the balance. That means the amount you pay every month shrinks as your balance is reduced. Just boosting your payments to a fixed amount of $200 per month means you'll retire the balance in about 2.7 years and pay a total of $1,314 in interest, even if you continue to pay off the debt at the original 18 percent interest rate.


Combine a larger monthly payment with a lower-rate balance transfer and you can get
you out of debt even faster. Lowering the rate to 7 percent and paying $200 per month will get you out of debt in 2.3 years, with a total of $420 in interest. At a 0 percent interest rate, you'll discharge the debt in just over two years and pay no interest at all.


Even if you don't qualify for a 0 percent rate, make the most of any lower rate you can get through a balance transfer offer or by negotiating with your existing credit card company for a lower rate. And, if possible, increase your monthly payments. If you snag a 7 percent interest rate and make payments of $500 per month, for instance, you'll pay off the $5,000 in less than a year and surrender only $167 in interest.




Distributed by Tribune Media Services


By Kimberly Lankford, Kiplinger's Personal Finance
January 13, 2012 http://www.chicagotribune.com/business/yourmoney/sc-cons-0112-money-consumer-watch-20120113,0,7127235.story