How do you like that catchy title? Now that I've got your attention I want to point out a couple of important step I took to reduce my finance charges by 66%.
Six months ago I was paying over $276 in finance charges every month. That's not including student loans, car loans, or mortgage. Thats over $275 finance charges to credit card companies. I can honestly say that besides rent, there is NOTHING that I spend that much on every single month. Not even on groceries, gas, and phone combined. I felt hopeless for a very long time. The first rounds of calls I made to the credit card companies to lower my rates were greeted with complete disrespect and indifference.
This month my finance charges were about $93. That $183 in finance charges that now goes directly toward the principal balance each month. This alone has allowed me to accelerate my debt reduction. I also want to note here that my finance charges will jump up to around $120 in August when my 0% balance transfer expires. Still a great improvement from where I was 6 months ago. So what was my strategy?
- Stop charging. Your finance charges will never go down if you keep charging! If you really want to use rewards make sure that you see a zero balance before using the card responsibly. Responsibly means that you are only charging what you know you can pay off in full each month. It never makes sense to earn a 1% reward while paying 15% interest!
- Do not miss payments. This is so important. You never want to get stuck with the default rate. I strongly suggest keeping an emergency fund that can cover your minimum payments for a month, at least, just in case. I always pay my bills the day I get them. This is win-win because I have no risk of missing the payment plus that finance charge doesn't have a chance to accrue interest!
- Keep calling. Periodically you should call your card companies and ask if they can reduce your rate. After several phone calls and a couple of letters, all of my cards have reduced my APRs.
- Balance transfer. Sometimes balance transfer offers are your friend. But make sure that you read the fine print! Pay attention to transfer fees. Note the term of the balance transfer offer - is it 6 months, a year, fixed forever? Read the story of three balance transfers.
- Watch your finance charges. I obsess over finance charges. I'm talking I do the math, could tell you the APR and last two months finance charges for each of my accounts because I keep them in a spreadsheet that I update frequently. You don't have to go that far. This could be as easy as comparing this month's finance charge with last month's. If you are following rule number 1, your finance charge should go down every month. Going up is a red flag. Try to figure out what has changed and call customer service to verify. Don't let them take advantage of you! Read how Chase tried to pull a fast one on me. (Link coming soon.)
- Make extra payements. The best way to reduce your finance charges it to reduce your principal. Period. I strongly suggest reading a primer on snowflaking over at paid twice if you are new to this concept. NCN talks about paying $5 to his credit card every single day for the psychological boost of seeing thirty payments a month! Read about how making extra payments to my Prosper loan is saving me lots of money!
- Consolidation loan. Don't even consider this until you've mastered the other steps and you're serious about getting out of debt. I've talked before about using Prosper to pay off my high interest cards. This made sense for me because I has balance with Chase and Discover at 29-30% and a couple small balances on store cards from 22-25%. I applied for a loan of $5000 (enough to cover all of the above) at a rate of 19% (best I could hope for with a D rating). The people at prosper were kind enough to bid my loan down to 14.9%. Not only did this cut my finance charges but it gave me some leverage. It bums out the company when you used to pay they used to make $50 off of you every month and now they make nothing. Chase was all of the sudden willing to make me all kinds of great deals. Imagine that. However I can't stress enough that you need to be careful with this. If you go back to your old ways you'll be in even deeper. Don't go back!
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