# Interest Rates And Consumer Debt – what you should know about it

The interest rate is a percentage charged on the money you borrow. It can be applied to loans and credit cards. Interest rates are a big factor when it comes to consumer debt, especially when you’re repaying your debt. With credit cards, interest in the form of a finance charge is added to your balance monthly until you pay off the balance unless you pay the balance in full before the grace period expires. The higher your interest rate, the higher your finance charges will be. When you’re trying to pay off your debt, higher interest rates are detrimental because much of your payment goes toward the finance charge.

## Interest Rates Example

The finance charge on a \$20,000 balance at 10% APR would be \$167. With a payment of \$400, about \$233 goes toward reducing your balance; the rest is applied to the interest.

If that same balance had an APR of 20%, the finance charge would be \$333. With the same \$400 payment, your balance would only go down by \$66! Since your balance is only decreasing by a little bit every month. It will take much longer to pay off your debt.

In the first example of \$20K at 10% APR. It would take just under 5 ½ years to pay off your debt if you consistently make \$400 monthly payments.

However, at 20% APR, it would take you a little more than 9 years to completely pay off the balance and that’s assuming your interest rate doesn’t go up, you don’t make any additional charges or have any fees added. And you continue to make the same monthly payment each month.

### How Much Interest Do You Ultimately Pay?

In the first example, you’ll pay \$5,980 in interest by the time you pay off the balance. In the second example, at a 20% interest rate, you would pay significantly more – \$23,360!
The only way to save money on interest is to significantly increase your monthly payment – to \$820 per month – or to get your credit card issuer to lower your interest rate. This can help you pay off the balance in less than three years with that payment. Even with the higher interest rate.

### Getting a Lower Interest Rate | Interest Rates and Consumer Debt

Convincing your credit card issuers to reduce your interest rate isn’t always easy, especially if you don’t have the credit history to qualify for a lower interest rate elsewhere. However, here is a way out: if your interest rate increased because you were 60 days late on a credit card payment, the credit card issuer has to lower your rate after six consecutive timely payments. Even if you’re less than hopeful about getting your interest rate decreased, it’s worth a try. And if your credit card issuer turns you down this time, try again in about six months.