The Scenario
Let's say you owe $5,000 on your Visa card, and your credit card company charges you a rate or 32.99% interest. You've budgeted $150per month toward paying off the debt, and you've comitted not to use it again until you have the balance paid off.
A) How long will it take you to pay off the balance of your debt?
B) If you talked to the company and had the rate reduced to 23.99%, how long would it take you to pay off?
C) If you negotiated the rate down to 14.99%, how long woul dit take you to pay off?
Answers
A) Solving for N, I/YR is 32.99%, PV is $5,000, PMT is -$150, FV is 0
N is 91.50, which means that it will take 7.63 years to pay off the debt
B)Solving for N, I/YR is 23.99%, PV is $5,000, PMT is -$150, FV is 0
N is 55.46, which is the equivalent of 4.62 years (3 fewer years than with the 32.99% rate)
C)Solving for N, I/YR is 14.99%, PV is $5,000, PMT is -$150, FV is 0
N is 43.38, which is 3.61 years (4 fewer years than with the 32.99% rate, in other words, less than half the time)
Discussion
For people who carry a balance month-to-month on their credit cards, they tend to pay very high amounts of interest on those payments. Many times, credit card companies will reduce a customer's rate with nothing more required than a simple request of the customer. Alternatively, transferring a high-interest debt to a lower-interest credit card will generally carry an up-front fee, but may end up being worth it if it comes with a significant reduction in interest rate.
