How Much Money Will I Save With a Lower Interest Rate on My Credit Card?

Approximate Savings

If your credit card balance is about the same amount every month, you can estimate how much you will save each month with a lower rate. Do this by multiplying your usual interest fee by the proportion of interest you will be paying with the new rate. Divide your new interest rate by the old interest rate to find out what proportion the new rate is. For example, say you used to pay $62.30 in interest each month when your interest rate was 16 percent, but now your interest rate is only 13 percent. Divide 13 by 16 to get 0.8125 and multiply this by $62.30 to estimate that your new interest bill will only be $50.62, for a savings of $11.68 per month.

If your credit card balance changes each month because you are making large payments or making purchases that far exceed your payments, calculate your monthly interest with a different formula. Multiply your average credit card balance during the month by your monthly interest rate, which is your annual interest rate divided by 12. Do the calculations for your old and new interest rates to find the difference. For example, if you expect to pay interest on a balance of $7,000 next month and your interest rate now is 16 percent, divide 0.16 by 12 to get a monthly rate of 0.0133 and multiply by $7,000 to get interest charges of $93.10. Repeat the calculations with 13 percent instead of 16 to get an interest charge of only $75.81, which is $17.29 less.

Use an online credit card payoff calculator to estimate how much you would save in the long term by lowering your interest rate while you pay off your balance. Enter your current balance, current interest rate, estimated additional monthly charges and the payment amount you plan to make each month. Repeat the process with your lower interest rate and compare the total interest cost. For example, if you have a balance of $7,000 at 16 percent interest and you make a payment of $200 each month, you will spend $2,319 in interest to pay the card off in 47 months. If you change the interest rate to 13 percent, the interest cost drops to $1,727 and you pay off the card in only 44 months. In this example, you will save a total of $592.

The calculation of savings is especially important if you are considering transferring your balance to a card that charges a fee for the balance transfer but has a lower interest rate. If the projected savings on interest exceeds the amount of the balance transfer fee, the transfer could be a wise move. However, you should also consider whether you will have the discipline to make payments on time every month. If you do not, you could be hit with a penalty interest rate that will quickly wipe out any money you saved with the lower interest rate.