About Credit Card Interest Rates
The credit card trap
As we continue to slowly recover from the current recession, many people are so hard pressed to the wall financially that they do not have enough cash on hand to meet their most pressing financial obligations.
Car payments and insurance, monthly rent or mortgage payments, soaring utility bills for heat and light, huge jumps in the price of gas, and even the cost of putting enough food on the table to feed a family are overwhelming the paychecks, unemployment benefits, savings and even long-term investments of millions of people. In desperation, many folks turn to their credit cards as a means of survival, a decision that will ultimately trap them in a losing game of financial chicken.
Interest rates are a financial straightjacket
Even in today's ailing economy, many people continue to receive multiple applications from various credit card companies touting low interest rates (at least for a limited time), easy debt transfer opportunities, fast and convenient online application opportunities ("instant approval with minutes"), and the implied promise of salvation from financial ruin.
But within this silver cloud hides the dark reality of significantly high interest rates, multiple user fees that might not be fully disclosed or easily understood by the average consumer, and stringent loan terms virtually guaranteed to keep an average consumer locked in a financial straightjacket for decades.
It seems that any time the wind changes direction, a credit card company increases its interest rate or comes up with the idea for a new fee or a new payment guideline that is guaranteed to cost you additional money unless you are the type of person who always pays in full each month.
The biggest problem facing a person with a significant amount of credit card debt who also has a tight budget is to figure out how to make maximum payments while still keeping sufficient cash on hand for daily living expenses. Due to the mathematical facts of credit card interest rates, the length of time that it will take you to pay off your credit card if you only pay the monthly minimum is extremely long.
For example, let's assume that you have $5,000 in credit card debt and your interest rate is 9 percent APR (yes, that is a rate you are unlikely to encounter in the real world, but this is an example). At this percentage, you rack up a $37.50 monthly interest charge. Your minimum payment (let's say this is 2 percent of the debt) is $100.75.
In five years, if you have torn up this card and never use it again, you will still owe $2,329.37, close to half the original $5,000 you borrowed. To completely pay off this credit card, using this approach, will take you more than 20 years! At that point you will probably be unable to recall any of the items on which you spent this $5,000. In addition, the credit card company will have made a profit on your account of about $7,800. One relatively painless way to more quickly achieve debt relief is to double your monthly minimum, which will greatly accelerate the timeline.
While doubling your minimum is a positive step forward, this doesn't do anything to alter the fact that the interest rate you are paying is going to impede your accelerated payment plan. It might also be worth your while to contact your credit card company and ask for an interest rate reduction in return for cutting up you card. If they are willing to work with you, this will be of great assistance. If they are not willing to work with you, your only cost has been the time you spent speaking with one of their credit specialists.
Credit Counseling
There are a significant number of credit counseling companies that would jump to have your business. Many of these operations charge high fees for their services and will promise you far more than they can deliver. It is important for you to find a service with an office convenient to your home or workplace because it is advisable to arrange a face-to-face meeting to help you determine is this is a legitimate operation.
Ask friends, family or acquaintances for references. Another source of assistance could be your employer's HR office. Many states and the federal government also offer resources for credit counseling, debt management, and debt settlement programs. These are all good places to begin your research.