How to Calculate and Reduce Credit Card Interest Charges

The first step in reducing credit card debt is to review your situation. Then assemble the statements for each credit card that you hold and make a list of the companies. Have the telephone number, the credit card number, and the balance due readily available for each company. Write down questions as you are researching.

If you are on auto pay, read the terms of auto pay for each credit card. One company may not allow you to vary the amount of the payment . . . either you pay the entire amount due, or you pay the minimum payment due. Another company may allow you to add an amount to the minimum each month, or to choose an amount to pay that will not vary from month to month. The best way to get this information is to go to the website, and start to set up auto pay; you don’t have to save it, but that’s where the terms and conditions of auto pay will be.

How much interest are you paying?

On each statement there will be a section where your interest rates will be stated. There may be multiple rates for each credit card account. For each account, make a note of the balances and the interest rate that you are currently paying.  The rates can be shocking.  Here are some rates from 2009:

Purchases           34.99%                  $26.32                   $0.82

Cash advances   34.99%                  $102.49                 $3.18

Promotion            6.99%                    $7,475.27             $46.43

Just so you are familiar with the process, multiply $26.32 (the balance amount) by .3499 (34.99% interest).  That equals $9.2093 (the interest for one whole year at that rate). Divide that number by 12, (9.2093 / 12 = $0.76) and you have one month’s interest for the purchase balance. The amount actually charged ($0.82) is different because the banks use the daily periodic rate, which increases the principal by the amount of the interest each day. They get the daily periodic rate by dividing the annual percentage rate by 12, then dividing that rate by the number of days in the billing period, or a similar formula to give them a daily rate. 

The rates shown above are actual rates charged in 2009. These rates have been lowered on this account from 34.99% to 25.99% in 2011. Although the banks are occasionally regulated in what interest they can charge, these rates can change with little fanfare. They have notified you of their policy regarding the classification of debt, but if you threw away the letter without reading it, you may not know what a “cash advance” is.

Making the call

Say to the representative, “I would like you to lower my interest rate,” and she will evaluate your account. If she refuses to lower the interest rate, ask why. Typical answers will be because there was “adverse” reporting on your credit activity, or because your payments are too low, or late. Make a note of the answers.  If your payments are on time, then there is a chance that at least one company will lower your interest rate. If you are offered a balance transfer or another loan, refuse it for now, but get information.

Don’t respond emotionally. If you have reason to believe that someone has compromised your identity, that will be a different phone call, but for this project, it’s important to stay calm and write down the information that you are given. The companies will have different policies to set up payment arrangements if you can’t make these payments on time.This, too is a different project that will take longer. 

Verify your interest rate and ask the representative how you can get it lowered.  Antagonizing the customer service representative could jeopardize the reason for your call, which is gathering information.  If the rep is irritating you, just call back and talk to someone else. On the other hand, if the rep is enjoying talking to you, then she may give you some valuable tips on handling your account with her company, maybe more information than she usually gives. Don’t talk too long.  The calls should be short, pleasant, and to the point.  If you have lengthy questions on more than one topic, call back. Keep the calls under five minutes.  The information you are requesting should be readily available, and shouldn’t require research. 

Set up a routine for making the payments

Now you can form a payment policy.  Make a list in your checkbook register of your credit card companies each month, with the due date of the payment at the end of the description line. This is very important because the due date is how you know which payment has been made. On-line account summaries can be confusing, and printed statements may not include recent activity. If the due date is included in the payment description, then you know which payment has cleared.

Many people pay their bills on-line, so a check number isn’t necessarily even part of the debit entry, but you need either a check number or a confirmation number. Consider going through the website of each individual credit card company because that way the payment will post first to the credit card account, and then be debited from your bank account a couple of days later. Be aware that the delays of electronic transfer or “snail mail” can make your payment late.

Each payment amount should be a few dollars more than the minimum payment, if you can afford it.  This will help to neutralize the practice of card companies using the daily periodic rate.  If you can afford to make a large payment, make the large payment to the card that is charging the highest interest rate. Try to pay off new purchases, if any, before interest is applied. Don’t respond to any offers of credit, don’t check your credit, and don’t use more than one card, preferably a debit card. 

Set up a routine for monitoring the payments

When the electronic “check” clears your account, mark the line with the date it cleared, not just a check mark. You need a record of when it was due, when it cleared, and the confirmation number (or the check number, if you pay by mail or through your bank’s website).

You can schedule on-line payments for when money will be in your account. Bookmark all the websites, schedule all the bills during your “bill paying session,” and watch the monthly list in your checkbook to re-assure you that they are being handled each month as the payments clear your checking account. If you don’t have a checking account, keep the list of payments each month somewhere else so that you can check the status of your payments.  If you don’t have a computer, then monitor credit card statements and bank statements, and call for the payment status each month to the 800 number on the back of your credit card.

After six months of perfect payments (more than the minimum, and on or before the due date), call them all again. You should have better success getting the rate lowered. 

Important things to remember

Monitor your payments every month. If a minimum payment goes up, find out why. Beware of auto pay if it doesn’t let you make more than the minimum balance. If you pay by check through your Bank’s bill pay section on an automatic basis, be sure that you are paying enough, and that you are allowing enough time for the check to reach the credit card company. If a balance transfer is too good to turn down, sleep on it before taking action, and make sure that the transaction fee doesn’t eat up any advantage in interest rate. Concentrate on paying off high interest balances first.