Consumer Credit Counseling

Credit Card Debt Elimination

Debt Adviser: Check finances first on credit deal

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, because we are having some financial problems. It said we could get a 9.99 percent interest rate for one year, and then the rate would 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 can be uncomfortable. But you have shown that some creditors are willing to make concessions when consumers 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. 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.

- Consider credit counseling as an option.

My question is this: Will this concession make a real difference, or is it just moving the deck chairs around on the Titanic?

Before you decide whether to accept your creditor’s deal, you must determine 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. If you are adding to your credit balances each month, you need to adjust your spending. 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 decrease only 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 about $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, you never know what may happen in a year. Your financial situation could improve a great deal, allowing you to make larger monthly payments to pay off your credit card. Or your financial situation could be the same or worse. Ideally, you can make adjustments so you can pay off the remaining 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.

If this credit card is one of many, or if you need help determining how to adjust your expenses, you might contact a nonprofit credit counseling agency. Your certified counselor will help with your budget.

You may want to consider a debt management plan to get your debt paid down as quickly as possible.

Posted November 27, 2010 at 10:16 p.m.
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