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How to Lower Interest Rates through Credit Counseling
835054_30682681-(1).jpgYour commitment to become debt free through credit counseling can be rewarded through lower interest rates on your credit cards. That's because creditors want to provide an incentive and a means for you to stick with your plan so that you pay off your debt and avoid a future default.

This incentive plan is called a debt management program (DMP) and it is available to distressed debtors that complete credit counseling. These programs allow you to give up your reliance on credit cards while benefiting from reduced finance charges on your debts.

Interest rates available to debt management program participants were much lower following 2009. This is due to the high number of defaults that credit card companies were struggling to prevent. Their reaction was to improve the rates available through these programs so that struggling borrowers could benefit from the resulting lower payment.

Reducing your interest rates allows for a much higher percentage of your credit card payments to actually go towards your principal payment. Consider one example:

  APR Finance Charges Principal Payment Minimum Payment
Card with $5,000 balance at default rate 29.99% $124.96 $50.00 $174.96
Card on DMP 7.40% $30.83 $69.17 $100.00

Of course, the impact of this lower interest rate is magnified when you have accounts that are penalized by charging the default interest rate. You can see that the biggest difference is the lower finance charges that this client would pay on this account. This results in the client benefiting from a lower monthly minimum payment while still paying more towards the principal balance before.

Consider a more moderate example:

  APR Finance Charges Principal Payment Minimum Payment
Card with $5,000 balance 18.99% $79.13 $50 $129.13
Card on DMP 9.90% $41.25 $70.75 $112.00

In this instance, you can see that the minimum payment dropped a more modest 13% on this card. Even with the lower payment, this client sees an additional $20.75 of that payment going towards the principal balance. The drop in finance charges is still quite pronounced, which translates into well over $450 in interest savings the first year on the program.

Interest rate reductions are not automatic, nor are they guaranteed. Each individual creditor has guidelines on what accounts are eligible for program benefits. Also, each creditor establishes the benefits that it chooses to offer through debt management programs.

The interesting part about a debt management program is how it helps you consolidate payments on a number of credit card accounts. Some cards may offer relatively few or even no benefits, while other cards can lower interest rates to almost nothing. The result is that most qualified DMP candidates can expect to see reduced interest rates. Those lower rates in turn can result in moderately lower payments.

Remember that benefits are not available to everyone, and someone that does not need a debt management program should not be enrolled. DMPs are strictly for qualified debtors that have completed credit counseling.
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