How Much Could a Credit Card Interest Rate Reduction Save You?
Since this week is the Credit Rate Reduction Rally I wanted to explore, each day, one of the areas that the rally touches on. You can imagine that credit card companies are in the business of making money off of your spending money. Each time you spend money on your credit card and carry a balance for the specified period of time, your card company will charge you interest. There are three way that the credit card companies may calculate interest: Average Daily Balance, Adjusted Balance, and Two Cycle Balance [see: How Does Your Credit Card Calculate Interest]. Since Average Daily Balance is common, we’ll assume that your credit cards use this method, but check your agreement, it could be different.
Given that there are multiple variables, we’re going to save time to present a principle: Lowered interest rates can save you huge amounts of money, even if you pay off a loan in the same standard amount of time. Below is a chart that outlines this principle.
The other side of lower interest rates is that you can pay off the loans faster at a higher payment per month. For example, the chart below shows that the payment is nearly identical for all three loans, but that the time period for paying off the loan is significantly faster with the lower interest rate.
The other side of paying off the loan faster is that you’ve also paid less interest, which means more of your money later on to do what you want with, for example investing, which works in the inverse: the higher interest you earn, the greater the return on the investment. Think of interest rates as reverse investing: the more you pay, the more others are making off of you. Their investment was the initial cash and patience with time, their return could be thousands of dollars.
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January 7th, 2008 at 3:12 pm
[...] be writing an article a day this week on the benefits of lowering your credit card interest rate. Here’s the first article. « Praying for [...]