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What’s The Impact of a 16.9% Interest Rate?
Assume you want your credit card company to lower your interest rate – maybe from 16.9% to 5.9%.
To figure the simple annual interest on any debt, take the total amount you owe and multiply it by the interest rate, expressed as a decimal. HINT: To get the rate shown as a decimal, just move the decimal point over two places to the left.
So let’s say you have a $3,000 Visa bill at 16.9% interest. If you’re not aggressive about knocking this debt out, that $3,000 balance will take 16 years and 7 months to pay off. Why? You’ll pay about $60 a month, assuming you only make minimum payments on your outstanding balance.
Annual Interest: $507
Let me show you how I got the annual interest of $507.
Note: the formula for figuring simple annual interest is: Amount owed ($3,000) x Interest rate (shown as a decimal) (.169) REMEMBER: to show the 16.9% interest rate as a decimal, I just moved the decimal point over two places to the left.
So $3,000 x .169 = $507
Annual Interest = $507
But What If You Had A 5.9% Interest Rate?
You’d pay a lot less in finance charges and … You could knock out this debt in just one year. Here’s how:
New Annual Interest: $177
Your original debt of $3,000 plus $177 in annual interest totals $3,177. To get rid of that $3,177 in a year, you’d need to pay $264.75 a month, since:
$3,177 (total debt) = $264.75 (required monthly payment) 12 (months)
In this example, negotiating to get a better interest rate would give you the ability to pay off this debt in one year instead of 16 years; and the lower 5.9% rate would also save you thousands of dollars in interest charges over time.
By the way, which way do you want interest to flow in your life? Realize that as a consumer, all you do is pay interest. Once you get financially fit and start saving and investing, you start to collect interest. Once you truly get the concept of interest, you’ll probably agree with this statement:
Those who understand interest are destined to collect it; those who don’t are doomed to pay it for life.
That statement is really just a variation of what the Bible teaches. Proverbs 22:7 says: “Just as the rich rule the poor, so the borrower is servant to the lender” (my emphasis added). So when you borrow, you become a slave, of sorts, to your creditor.
What’s the Best Time To Negotiate with Creditors?
It’s almost always better to deal with creditors before you actually miss a payment. Creditors are much more willing to work with you if you’ve paid your bills on time. They’re trusting that you’ll continue to honor your obligations – even if it means paying only minimum payments, or even less than the minimums, if that’s an agreement that you stick with.
If your credit is already shot, it’s often more advantageous to negotiate with creditors after the debt you owe is so old that the creditor has practically forgotten about it.
What do I mean by this? Let’s look at the two following scenarios. Say you lose your job unexpectedly. Statistics show that it’s not easy – or fast – to find a replacement job. On average, it will take about one month to replace every $10,000 in income lost. So if you were among the top wage-earners in this country, and you had a six-figure job paying $100,000, it will probably take you about 10 months to find a similar paying job. Likewise, if you were earning $40,000 a year, on average, it will take you four months to find a comparable-paying position. In the meantime, if you don’t think you can pay all your bills, start calling your creditors immediately. Ask them to lower your interest rate, even if only temporarily. Again, credit card companies and other lenders are much more willing to be flexible for people who take the time to initiate the process of working out a payment plan, a reduced interest deal, or whatever.
But let’s say you have an old debt – a $2,000 bill that you racked up three years ago from a department store. For whatever reason, you never paid that bill and the store has already reported your non-payment on your credit report. The department store has also “written off” your account as a “bad debt expense.” So if you come along now and offer to make a lump sum payment as a settlement in lieu of payment in full, chances are the creditor will go for it. After all, that company would rather get some money from you, than no money at all. If you work out one of these deals, however, make sure you get the creditor to first agree in writing that it will completely delete the negative history from your credit report if you send in the agreed-upon payment.
If a creditor just marks your past due account as “Paid” or “Paid as Agreed,” that may do absolutely nothing for your credit score. They have to also agree to delete any references to late payments that they may have previously put on your credit report. Never let them “upgrade” your account status to “Paid Collection” or “Paid Charge-Off.” Negative information can legally stay in your credit file for seven years, based on the date of “last activity.” So changing your account to “Paid Charge-Off” restarts the clock, adding another 7-year negative mark to your file. Look at Appendix B for a Sample Settlement Letter to creditors to get them to agree to a settlement and remove negative marks from your credit file.
Next – Day 5: Call Your Creditors and Negotiate (Part 3)
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