Every now and then, I am asked how we managed to reduce our finance charges. Right now we pay $0.00/month, but back when we had over $37,000 in credit card debt we were paying over $400/month.
In order to pay off our debt as quickly as possible, we had to slash those finance charges and have more of our payments go toward the principal and not interest. In five months, we reduced our finance charges from $400 to around $100. Sixteen months after that, we were able to reduce our finance charges to $0/month. That’s where they sit right now and I love it! Every dime we pay towards our credit cards is now going towards the principal balance and not interest.
It took some work and it took some time. Here’s how we did it.
1.) Called our credit cards to see if they would lower the interest rate
This is the one piece of advice that you hear over and over again – call all of your credit cards and ask them for a lower interest rate. I did that a few times. Did it work every time? No. But did it work at least once? Yes. For a few minutes of your time, it’s worth a shot. If it doesn’t work the first time, try again a few months later.
2.) Attacked our credit card debt
Being $37,000 in the hole didn’t make us very “good” customers. Our cards were almost maxed out and we were only making the minimum payment. To show our credit card companies that we were serious, we had to attack our credit card debt. We worked overtime. We sold stuff. We lived frugally. If we had extra money, it went towards our credit card debt. We attacked our debt.
3.) Worked to increase our credit scores
Increasing your credit score can sometimes turn into a hot topic. Some people think that your credit score isn’t important. I think it is, especially since we needed a great credit score because we may be looking for a new mortgage in a few years. There isn’t much that we did here except pay bills on time and pay off as much of our debt as possible. Reducing our debt decreased our credit utilization ratio which increased our credit score. Since February of 2006, my credit score has increased from 711 to 763 (although it was 800 at one point – more about that later).
4.) Transferred balances
I started reading through every balance transfer offer we received instead of shredding them without a second glance. I was looking for a great balance transfer rate with no balance transfer fee. We were able to use a free balance transfer when one of our cards raised their interest rate. Recently, a 0% offer that we obtained expired and I wasn’t watching those offers as much as I should have. By looking at available offers online, I was able to see that one of our cards did have a great balance transfer rate (0%) with a 3% balance transfer fee. After running numbers, it was a good deal for us even with the fee.
5.) Obtained a loan from Prosper.com
Prosper.com is becoming well-known as a place to go to try to consolidate your debt on your own terms. Everyday people go there to lend and borrow money. When I first heard of it, Prosper was fairly new but I decided to give it a shot to try to reduce our interest rates. It worked. Thirteen lenders bid on my $3,500 loan request and they reduced my interest rate from 13% to 9.9%. Another note about Prosper loans – they have a fixed interest rate! No more worrying about that interest rate magically increasing.
6.) Used our cards strategically
I have my own credit cards and my husband has his. We used this to our advantage. For a while, all of our debt was split evenly between our cards. We had a goal of getting a 0% credit card offer, so as soon as we could we shifted all of the credit card debt to my husband’s cards. My credit score shot up to 800 and I was easily able to get a 0% offer because our credit card debt was no longer attached to my name. I should have checked to see what it did to my husband’s score, but I didn’t think about it at the time. I’m sure it took a temporary nose dive.
7.) Applied for a new credit card with a 0% balance transfer offer
Once all of our debt was on my husband’s credit cards, I found a good no annual fee 0% balance transfer offer and applied for it. I was only given a $4,000 credit line, but as luck would have it, the card I applied for had the same parent company as one of my other cards. I was able to transfer some of the credit line from the old card to the new card and voila! All of our credit card debt was now at 0%. From what I’ve heard, not all companies will shift credit limits around so some good fortune did help us out with getting all of our credit card debt at 0%.
We were were able to pay off $29,000 of our credit card debt so far thanks to some slashed finance charges. If all goes well we will be credit card debt free next year. Reducing our finance charges took some time but it was worth it.