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Whether you’re looking to reduce your debt or you want to position yourself to build wealth for the future, paying off high-interest credit cards is a good move. The U.S. Securities and Exchange Commission points out that no investment strategy pays as much return as getting rid of your high-interest credit card debt does. That’s because if you invest your money, you’re very unlikely to make as much as the 18% or more you’re paying on high-interest credit card debt.
But what are high-interest credit card rates? And once you identify that your card comes with a high interest rate, how do you go about paying it off? Read on to get some easy-to-follow steps for dealing with your credit card debt.
What Are Credit Card Interest Rates?
Credit card interest rates are the amount the lender charges you for the use of its money. If you use a credit card to buy $500 worth of goods, you’re using the credit card bank’s money to do so. And if you don’t pay it back immediately—within the statement cycle—the bank charges you a fee for using its money. That fee comes in the form of interest.
Credit card interest rates are typically higher than interest rates for other forms of credit forms, like auto loans or mortgages. That’s because credit card debt isn’t secured. The lender can’t come and take your property and sell it to recover losses if you don’t pay your credit card statements. That makes credit card debt riskier, so lenders charge more interest to make up for that risk.
How high your APR—short for “annual percentage rate,” which is another term for the interest rate—can also depend on your credit score. That’s because the lower your score, the riskier you seem as a borrower. Again, the lender might charge a higher interest to make up for that risk.
Credit card interest rates can range from 0% for introductory offers to as much as 30% or more for those with bad credit or who have missed payments on their accounts and been charged penalty interest. According to the Federal Reserve, the average credit card interest rate for all accounts in 2019 was around 15.05%.
Rates that fall at or below the average of 15% may be considered decent interest rates for credit card debt. Rates that are above the average are considered high.
High-Interest Credit Cards
High-interest credit cards cost more to use if you don’t pay off your balances every month. But if you can pay those balances regularly and your card comes with really great rewards, you might be able to make money off the card.
The problems start as soon as you begin accruing interest. That high rate can add up fast, causing you to owe more than you realized. And if you’re ever late on your payment, you might be charged late fees and penalty interest that compounds the problem. High-interest credit card debt can snowball into a balance you struggle to keep up with, and that can lead to damaged credit history and even being put into collections and sued for the amount you owe.
How to Pay Off High-Interest Credit Cards
If you see that your high-interest credit card debt is beginning to build, taking proactive steps to pay off those balances can be a good idea. Here are some steps to pay off high-interest credit cards and avoid the negative consequences stated above.
Stop Using These Cards
The first step to battling credit card debt is to put the plastic away. If you’re still spending with the card, you’re going to struggle to pay the balance down. At best, you’ll experience a two-steps-forward, one-step-back approach to debt reduction, which is frustrating and can cause you to quit before you reach success. So if possible, stopping all use of your high-interest cards is the best way to go.
Decide Which Method You Prefer
When dealing with multiple credit cards, decide whether you’re going to use the snowball or avalanche method of paying down debt.
- The snowball method. Order debts according to the total balance owed. Make minimum payments on all debt while putting any extra money you can toward the account with the smallest balance. Once you pay that debt off, transfer all extra money you can to the debt with the next smallest balance. By the time you get to the last and largest debt, you have a lot more money to throw at it every month.
- The avalanche method. Order debts according to interest rates. Make minimum payments on all debt while putting any extra payment you can on the account with the highest interest rate. Once you pay that debt off, transfer all extra money you can to the debt with the next highest interest rate. By targeting the highest interest rates first, you reduce the total amount it takes to pay off your debts.
Pay More Than the Minimum
Paying only the minimum amount on a card stretches out how long it takes to pay it off and maximizes how much interest the credit card company earns. When you pay more than the minimum, you pay your debts off faster.
Consider this example. You have a balance of $1,000 at a rate of 18%. Your minimum monthly payment is $40. Paying just the minimum, it takes 32 months—that’s almost 3 years—and $1,263 to pay off your debt.
If you can pay just $30 more per month—$70 total—you can pay off the debt in 17 months, and you’ll only pay $1,134 total. Not too bad, right?
Request a Lower Interest Rate
If your credit history is strong or you’ve been a card holder in good standing with a company for some time, you may be able to request a review for a lower interest rate. Reach out to customer support for your cards to make this request. A lower interest rate can help you pay your credit card debt faster and with less money.
Reevaluate Your Expenses
One of the best ways to pay down credit card debt faster might be to pay more than the minimum, but where do you get that extra money? Take a look at your personal budget and reevaluate your expenses. What can you cut, at least temporarily, so you can put more money toward your credit card debt each month?
Consider a Balance Transfer
If your credit is good enough, you may be able to get approved for a balance transfer card. These cards offer 0% APR on transferred balances for a short period of time—usually one to two years.
That means that you don’t pay any interest during that time as you work to pay off the card. If you transfer $5,000 to a card with a 24-month 0% APR offer, you can pay $209 per month and pay the debt off in 2 years.
Other Ways to Get Rid of Your High-Interest Credit Card Debt
In some situations, you simply can’t afford to make more than the minimum payment. And sometimes, juggling too many credit cards can result in mistakes and missed payments that lead to higher interest and negative items on your credit history. Here are two other options you might consider.
Debt Consolidation
First, you can take out a debt consolidation loan. Usually, these loans come with lower APRs than high-interest credit cards. They also let you take control of your debt because you only have to make a single payment each month.
Another benefit is that you can consolidate multiple types of debt, so this might be an option to consider if you’re struggling with credit card debt plus personal loans or medical bills.
Debt Settlement
Or, if you’re already behind on payments to a credit card company and don’t see how you can catch up—or if the credit card lender has already sent your account to collections—you might consider settling the debt. This involves an agreement between you and the creditor that you will pay a lump sum that’s less than the total you owe. In exchange, the creditor considers the balance paid in full.
Ultimately, how you handle your high-interest credit card debt depends on your overall financial situation. Whatever you decide to do, know that paying down high-interest debt comes with some great benefits, including peace of mind and the freedom to use your income in the future for other things, like saving or investing or going on vacation. It will take work, but the rewards will be worth it.
