5 Practical Ways to Pay Off High-Interest Debt

Know what sucks? DEBT. Especially if it’s high-interest debt. One of the least fun activities in existence is adding up what you actually owe, but it’s critical to do this so you know where you stand. Unfortunately, the problem will not go away and only worsen if you neglect it.

It’s hard to know where to start when paying off debt. It can feel overwhelming, isolating, and even embarrassing. Take a deep breath and remember that our nation’s credit card debt is said to be around $1 trillion with interest rates averaging 20%; as tough as it is, you are not alone. The stress of carrying high-interest debt doesn’t have to last forever. I’ve come up with 5 practical steps for paying off high-interest debt. Following a plan like this will allow you to fend off that pesky debt once and for all. 

What is Considered High-Interest Debt?

There’s no magic threshold for high-interest debt. However, any debt that comes with a significantly higher interest rate compared to other forms of borrowing is considered high interest. This typically includes credit card debt, personal loans with high interest rates, payday loans, and some student loans. Think of it like the difference between a 5% mortgage rate and the 24.99% Nordstrom card. 

High-interest rate debt sucks and can quickly become overwhelming because of the high interest charges that accumulate over time, making it difficult to make meaningful progress in paying them off.

Why Should I Prioritize Paying off High-Interest Debt?

You may be thinking, “Amanda, I want to get completely out of debt, why should I worry about paying off high-interest debt?” Or you may be thinking your 10% APR personal loan isn’t that high of a rate, why sweat it?

Paying off high-interest debt should be a top priority for everyone trying to improve financial well-being.

Here are a few key reasons why you should pay off high-interest debt:

Save Money

High-interest debt will cost you a significant amount of money over time. By paying off these debts, you can reduce the overall interest charges and save money in the long run.

Improve Credit Score

Having a lot of debt, especially debt that carries high interest rates, can negatively impact your credit score. By paying off these debts, you can improve your credit utilization ratio, which is an important factor in calculating your credit score, and this can ultimately lead to you getting better rates for loans on big ticket purchases like cars and houses in the future.

Financial Freedom

High-interest debt keeps you tied to strict repayment terms, continuously mounting interest, and can limit your financial options. 

Think about it, do you want to be handing over your hard earned dollars to a lender or taking that trip to Switzerland you’ve been putting off?

By paying off these debts, you free up your income for things you actually want to be spending your money on and you gain more control over your financial future.

How to Pay Off High-Interest Debt

Now that you understand the importance of paying off high-interest debt, let’s take a look at how to pay off high-interest debt. 

These are practical steps you can take because I believe you should still be living a life you enjoy while trying to get out of debt. Never going out to eat again or getting another mani until you’re debt free is a guaranteed way to give up on your plan. 

If you want it to be sustainable, it needs to be something you can actually follow. This means you probably want to hang out with your family and friends at some point - build that in!

And while these steps are meant to be practical, meaning you can actually apply them to your life, this doesn’t mean it’s going to be easy. This also means you shouldn’t continue to put things on your credit card. But if you are disciplined, you can do it.

Step 1: Figure out how much you owe. Literally add up every debt.

I won’t lie, step one is tough. You have to look at the problem head on.

Gather all your debt statements and make a list of each outstanding debt you have. Include credit card balances, personal loans, payday loans, and any other high-interest debt. Knowing the total amount you owe, even if it hurts a little, will provide a starting point for your debt repayment plan.

Step 2: Review each interest rate. List them out high to low.

Once you have a list of your debts, prioritize them based on their interest rates. 

Start by tackling the debts with the highest interest rates first, these are the ones racking up  the most in interest charges. When you focus on  high-interest debts first, you'll make the most significant impact on reducing your overall debt.

Step 3: Review each minimum payment. List them out with due dates.

Next, review the minimum payment requirements for each debt and make a note of their respective due dates.

It's essential to stay organized and ensure you meet all your minimum payment obligations on time. You don’t want to tack on any penalties or additional fees. To simplify this, make a note of  these due dates in your calendar or set reminders on your phone to help you stay on track.

Step 4: Automate all minimum payments. You want to avoid defaulting on debt!

To avoid missing any minimum payments, set up automatic payments for all your debts. Most banks and lenders offer this service, allowing you to schedule regular payments directly from your bank account. Automating your minimum payments will keep you current on your debts and avoid defaulting, which can negatively impact your credit score and further increase debt. 

Step 5: All extra $$$ to the highest interest rate.

Once you have your minimum payments automated, it's time to allocate any extra money towards paying off your high-interest debt. By focusing on the debt with the highest interest rate, you'll make the most significant impact on reducing your overall interest charges. This approach is known as the debt avalanche method, and we love it because it allows you to efficiently pay down your debts and save money in the long run. You go, Glenn Coco! 

Money with Amanda Tips

As we wrap up, there are a few points I want clarify:

⭐ When I say “all extra money”, I don’t mean literally every extra penny to your name.

This debt journey could be a long one. Make sure you build in a cushion for your expenses as well as some fun money.

We work too hard for our money not to enjoy it. Find a balance between getting out of debt and not locking yourself inside of your house like the Princess Peach of debt for months on end until it’s paid off. 

⭐ If you do not have an emergency fund, make sure you are contributing to that as well.

You don’t want to go into more debt in the future if something happens. Make the minimum payments on all of your debts - then after budgeting for the rest of your bills and a little fun - throw that extra money at it.

⭐ Don’t sleep on adjusting your due dates!

If you find that all of your bills are due at one time and it’s causing you more financial stress, call and get them changed. Stagger them so that your paychecks over the month can account for them.

⭐ Don’t be afraid to call up your credit card company or other lender and negotiate a lower rate.

Be sure to know your financial situation ahead of time including your credit score, your on-time payment history, and it might not hurt to even do a little research on rates for other cards and banks. Credit card companies are businesses. They’re in competition with other companies to keep your business and they want to remain competitive.

Know that this might not always work, but it doesn’t hurt to try! 

⭐ Consider refinancing high-interest loans. 

Just like credit card companies, banks and lenders are businesses making money because of you. They compete with one another to get and keep your business. If you have a high-interest loan be it a personal loan or a student loan or something else, do your research and see if there is a lender with a lower interest rate. 

It may make sense to refinance your loan if you can find a lower interest rate, but remember there are a few things to take into consideration when weighing this option like fees associated with doing so, your credit score, whether the rate is an introductory rate, fixed, variable, etc. 

Wrapping Up

As I’ve said, paying off debt is a whole journey. 

To this day I remember the feeling when I became debt free. It is totally possible, it’s just going to take a solid plan that you can actually implement without making yourself crazy. 

You’ve got this!