Details

High-interest debt sucks. There are times when you may have no other option and having some form of credit or loan available that is high-interest can help you get out of a bind. But make no mistake; if it helps, it only does so at a very high cost. Your goal is to understand how it works, pay off what you have, and if at all possible, not acquire it moving forward.

Definition

High-interest debt refers to the interest rate charged to borrow money. Typically “high-interest” is anything at 10% annual percentage rate (APR) or higher.

Example: If I lend you $100 with a 10% interest rate and the interest compounds (charges interest on the interest) only once annually, if you pay me back within a year you’ll owe me: $110 (which is the principal you borrowed + 10% of that principal).

Common Examples of High-interest Debt & Corresponding Interest Rates

APR vs. APY: Sometimes you’ll see “APY” emphasized instead of “APR.” APY stands for “Annual Percentage Yield” and is a reflection of the fact that the frequency with which interest compounds can affect the total amount of interest owed over a given time. All you really need to know is that most high-interest debt compounds daily which means your APY will be a little bit higher than the APR. This calculator shows it clearly.

How High-interest Debt is Acquired

Credit Cards: The most common type of high-interest debt comes from credit cards.  If you use a credit card but pay the full balance before the statement due date (usually 21 – 30 days following the date you receive your statement), no true debt is acquired and no interest will be owed.

But the Federal Reserve has estimated that the average credit card debt of U.S. families is $6,270. In every circumstance, this debt came about because something less than the full statement balance was paid. So while you are only required to pay the “minimum monthly payment” as shown on your statement, if you do so you will be acquiring high-interest debt. Whenever you can, pay the full balance on your credit card statement.

Auto, Personal, & Private Student Loans: When you purchase a car with an auto loan, take out a personal loan, or private student loans, you are taking on debt. If you have less than stellar credit, it’s possible these loans will have interest rates which would qualify as “high-interest.”

If you already have high-interest debt, it’s important to ask yourself why. This isn’t about blame. But it is about being honest with yourself and understanding what got you here. Which statements below resonate with you?

• “My spending is for genuine needs and is reasonable. Unfortunately I don’t earn enough income and need to focus on making more money.”

• “I earn solid income but I almost never have enough to pay all my bills in full. It might be possible for me to reduce my expenses or purchase lower-cost items in the future.”

• “I have acquired high-interest debt but it’s for a genuine investment in my future. The extra cost is worth it to me and I won’t regret it in the end.”

In all likelihood, all three statements likely resonate to some degree. But only by being honest with yourself can you be at peace with where you are today, and create an effective plan for improving your debt situation moving forward. 

Why High-interest Debt is So Dangerous

Regardless of why you have high-interest debt or what was acquired with it, the following remain true:

• You’re paying extra: Everything bought on high-interest debt now costs you the original price, plus the total amount of interest you end up paying. If you want to improve your financial health, you can’t afford to pay extra. The sooner you break this cycle the better off you’ll be.

• Someone is making money off of you: There are many valid reasons for companies to lend money. And these companies don’t have to be corrupt or nefarious to do so. But you can’t forget that the longer you are indebted to them, the more money they make off of you. In this sense, your incentives and theirs are not aligned. Therefore you need to be clued into how you acquired your debt and your plan to pay it off. The best person to look out for you…is you.
  
  And remember: Credit card “rewards” make no sense if you’re paying interest on your debt. Even a great (and probably temporary or category-restricted) 5% “cash back” offer (and most are more like 1-2%) is completely useless if you’re paying 20% in interest. Don’t be fooled.

• The debt can snowball: If you find yourself in a situation where you are purchasing items with high interest debt that you want – but don’t need – (this could be clothing, a fancy car, travel, dining out etc.), you will not only have to pay extra for the things you bought, you will also have to break the habit that got you there in the first place. If you can’t really afford that $300 jacket today, do you really believe you’ll be able to afford it at $350 several months from now (which could be what you’ll pay when you factor in interest)? 

As more of your money gets consumed by interest payments for items bought yesterday, last week, and last month, you have less available to spend on the things you need today, this week, and this month.

Put another way, if you use high-interest debt to pay for things you want now, you may soon find you’re using high-interest debt to purchase things you truly need later. And this can become truly challenging to overcome.

Calculate Your Debt Payments

To get a clear picture of how much your high-interest debt may cost you as you pay it down, you can use Bankrate’s debt paydown calculator. Regardless of the type of debt you have, you’ll need three pieces of information, all of which should be available on your most recent statement:

• Interest rate – the rate they’re charging you (remember sometimes this will be constant and sometimes it will be variable depending on the loan or conditions of the line of credit)
• Current balance – i.e. the total amount you currently owe 
• Minimum monthly payment – the smallest amount the lender is requiring you to pay each month

Many Have Conquered Their High-interest Debt. So Can You.

High-interest debt can feel completely overwhelming. But there are plenty of ways to lower the debt, strategies to help pay it off faster, and eventually rid yourself of it completely. We’ll tackle these in upcoming tasks. But just know that if you have high-interest debt, you’re not the first and you won’t be the last. If you imagine what it will feel like the day you become debt-free, and follow your plan to get there, it will happen. 

You’ve got this!

Details

Regardless of your debt pay off strategy, it’s your “extra payment” that is going to be the difference maker in reducing your debt burden. Without making an extra payment – and ideally the true maximum you can afford – you’re simply not going to make progress on paying down your debt. This is particularly true if you have credit card debt since the minimum payment is usually only a few percentage points of your total debt. Only paying the minimum payment on credit card debt can result in years or even more than a decade before the full amount is paid off.

Therefore, it is so important to find a method for making this extra payment that is consistent and that works for you.

Methods to Applying Your “Extra” Debt Payoff Amount

There are benefits and drawbacks to each method. Use the chart below to you make your decision. But remember: What matters is not the method you choose but the consistency with which you follow-through. Following any one of the options below – every month – will allow you to make progress.

Method	Benefits	Drawbacks	Best For Those With
Make an Increase to Minimum	Single payment One amount to keep track of Payment happens automatically	Less likely to increase amount even if your budget allows for it in a given month	Regular income Relatively consistent budget
Schedule a Second Automatic Payment	Easier to cancel or skip second payment if money is tight while still knowing minimum payment is set up Payment happens automatically	Less likely to increase amount even if budget allows You may be more tempted to cancel second payment and just pay the minimum	Regular income or relatively consistent income Desire to see “extra amount” all as one transaction
Set a Reminder	Maximum flexibility Ability to precisely determine the maximum amount to pay each month	Payment is not automatic, easy to forget or skip Temptation to pay less than you could or should	Irregular income The discipline to prioritize maximum payments Willingness to calculate ideal payment amount each month

Reminders from Your Bank

If you choose to set a reminder, you can obviously use any reminder system that works for you including a reminder on your phone, a task management system, or something else. But take note: Most banks have features that allow you to set alerts and get reminded via text message or email. Not only can you set reminders based on when your bill is due, but when you hit certain spending limits and much more. Make sure to investigate your options!

Take Action

Set up your “extra payment” based on the method of your choice. Now you can rest easy that you have a clear plan for debt payoff that works for you.

<< Debt Consolidation Checklist

Three Steps for Debt with the MoneySwell Budget Planner Tool

1. Plan Tab: Track the amount you plan to pay on your new loan each month under the “Expenses” section.
   
   If you already use the MoneySwell Budget Planner tool for a plan that ends before your planned debt payoff, calculate how much you want to pay off based on the timeframe your plan currently covers. Then once that plan ends make a new one and do the same again. For example, if your plan goes through December but you won’t pay off your debt until the following July, simply determine how much you can pay each month from now until December and add that in as an expense. Then, once December is completed, create a new plan that starts in January and ends in July.
   
   
2. Update Tab: Each month, update what you actually paid.
   
   
3. Review Tab: Track your progress in the Review tab.

Conclusion

Don’t forget to add your new loan or line of credit, and remove your just-paid-off one from your list of liability in the Assets and Liabilities tool. As you make progress toward paying down your debt, when you sync your accounts you’ll see your debt going down and your net worth improving.

<< Debt Consolidation Checklist

When applying for a consolidation loan, the precise details of what is required of you will differ by lender and the type of loan you’re taking out. But be prepared for a hard check on your credit and providing a variety of other personal financial details.

Loan Details to Write Down

Once your loan or new line of credit has been approved, write down the most pertinent details in the notes section above including the following (depending on what’s applicable):

• Introductory Interest Rate
• Duration of Introductory Interest Rate and date it will end
• Interest rate (or best guess range if variable) after interest rate ends
• Loan term
• Amount you plan to pay each month
• Planned for payoff date

Conclusion

If you’ve been following the tasks in your MoneySwell plan (logged in users only), you’ve now written down some version of the the details above up to three times. Research has shown that this type of repetition and reminder can increase the chances of meeting your goals. And in the next task, you’ll see how you can use the MoneySwell Budget Planner tool to easily track your progress.

<< Debt Consolidation Checklist

Use a Reputable Source When Reviewing Loan Offers

You can search online for all kinds of different loan offers. But our personal favorite place to look is Bankrate.com. (Reminder: We have no affiliation with Bankrate. We just know the site has been around a long time and is reliable and trustworthy). Check out the links below based on the type of debt consolidation you’re exploring.

Types of Debt to Consolidate

• Balance Transfer Cards
• 0% Introductory Interest Rate Cards
• Personal Loan Rates
• Low-interest Personal Loans
• Personal Loans for Bad Credit
• Home Equity Loan Rates
• Home Refinance Rates

Once you have an idea of a debt consolidation option that will work for you, do a final crunch of your numbers. Use the debt payoff calculator or balance transfer card calculator. Then, once you’re confident of the direction you’d like to take, you’ll need to apply.

Take Action

In the notes section above (for logged in users), write down:

• The amount you expect to save on interest
• How many months faster you will pay off your debt by consolidating

The simple act of thinking through these details and writing them down will make you more likely to be successful in your debt payoff plan.

<< Debt Consolidation Checklist

To confirm if debt consolidation is a good idea for you, use a debt payoff calculator. We like this one from Bankrate.com. If you’re interested in one specific to using a balance transfer card, try this. Below is a list of the information you’ll need to work with the calculators.

Existing Debt Details

1. All Credit Cards with Revolving Balances: Remember, a “revolving balance” just means you have a balance left over after you pay your monthly statement. If you have a credit card that you pay the full statement balance on each and every month, you don’t need to include that here.
   

   A little bit of number crunching with one of the linked calculators can go a long way.

2. Credit Card Interest Rates: Credit card interest rates are variable. This means this month’s rate may change next month. For the calculator, just use the rate shown on your most recent statement. To find your interest rate:
   • Download your statement from your lender’s website
   • Open it up and search for “APR” (⌘ F on Mac, Control F on Windows) (APR stands for Annual Percentage Rate)
   • If your statement has multiple rates, find the one that applies to purchases. You now know your rate.
3. Payment Amount: Enter the amounts you’re currently paying each month. Then, go to the MoneySwell Budget Planner tool and look at the Plan tab. Are there ways you can reduce expenses or earn more income? If so – and you’re willing to apply those extra dollars to your debt – add that extra amount to one of your existing cards in the calculator.

Review Consolidated Loan Details

You’ll compare loan options in the next task. But for now:

1. Go to the “New Consolidated Loan” section in the Bankrate.com calculator.
2. Enter the total amount of your existing debt in the field for “Loan Balance.”
3. Play around with different numbers between the Payment and Interest Rate (based on what you think you may be able to get). Numbers you enter in one field will automatically update numbers in the other fields.
4. Make note of how these numbers jump around as you experiment with possible scenarios.
5. One you’ve entered all your information, click the “Calculate” button and then “View Report” button. This will clearly show you how much you could save and the total number of months it will take to pay off your debt.

Take Action

In the notes field above (logged in users only), write down the following:

• Monthly payment amount
• Expected interest rate
• Debt payoff date

Now give yourself a pat on the back. You’ve crunched your numbers and have a debt payoff strategy!

Debt consolidation may sound like a scary topic but it’s actually fairly straightforward. Done right, it can save you a lot of money. By the end of this article you’ll have a clear idea of what it is and if it makes sense for you.

What is debt consolidation?

Consolidation is just the idea of grouping things together to eliminate inefficiency. When you have credit card debt from multiple sources, you’re grouping those sources so you can eliminate the inefficiencies like keeping track of multiple interest rates, multiple payments, and multiple payment due dates.

Debt Consolidation Methods

Whatever the method of consolidation, the process involves taking out a new loan, using that loan to immediately pay off all your other credit card debts, and then paying back that new loan back over time. Here are some common ways that is done.

• Balance Transfer Cards – In this scenario you actually open up a new credit card and move the balance from your other cards to this new card. You will be offered what is known as an introductory or “promotional” interest rate that will last for 12-24 months before it’s set to jump up to a higher rate. Your goals are to find a card that:

• • Doesn’t charge a one time fee for paying off your old balances (known as a “Balance Transfer Fee”)

• • Has the lowest possible introductory interest rate (0% if you have good or excellent credit)

• • Has an introductory interest rate period that allows you to pay off as much debt as you can before the introductory rate ends.
    
    If you’re able to secure a 0% balance transfer fee, a 0% interest rate, and pay off the entirety of the loan before the 0% interest rate expires, this is absolutely going to be your best option. Every penny you pay will go toward lowering your principal and not to interest you would otherwise be charged.
    

• Personal Loans – These are loans offered by banks or credit unions. Typically, you’ll be able to secure an interest rate with one of these loans that is substantially lower than the average interest rate across your credit cards (but make sure to confirm since your credit rating can affect this and some personal loans have quite high rates).
  
  Typically the agreement of a Personal Loan will include a term period, the time you have to pay the loan back. Before taking out a personal loan, you’ll want to know that you can afford the monthly payments that will be required to pay back the loan on that schedule. (We’ll walk you through how to do this in the “Crunch Your Numbers” task.)
  

• Home Equity Loan – This is only something to do if you A) own your own home and B) have significant equity in your home (in other words the value of your home is substantially higher than the amount you owe on it). Importantly, this loan differs from the previous two in that you are taking on what is known as a “secured loan.” This means the loan is backed by collateral, in this case, your home. If you were to default on the loan, the lender can use that collateral to repay itself for the money it lent you.
  
  The home equity loan will have a term length associated with it and you will almost certainly be able to secure a much lower interest rate than the average across your credit cards.
  

• Cash Out Home Refinance – Just like the home equity loan, you need to own a home and have equity in it for this option to make sense. As with all refinances, you will be starting a new mortgage (that will replace your old one) that you’ll pay off on a set term, typically 15 or 30 years. Additionally, just like a home equity loan you’ll be getting a lump sum of cash you will use to pay off your credit card debt. This lump sum cash payment will be rolled into your new mortgage.
  
  Note that there can be significant closing costs associated with a refinance. Often, there is the option to roll those costs into the term of the loan so you don’t have to pay anything upfront. If your new interest rate is low enough, this can be a viable option.
  
• Other Options – There are other ways to help you reduce or get rid of credit card debt including raiding your retirement account (should be seen as a last resort) debt management plans (DMPs) offered by nonprofits, debt settlement plans (DSPs) offered by various third parties, or even bankruptcy. If you really feel like you have no other options these are worth looking into. But beware they may involve other sacrifices including penalties on removing retirement account money, a temporary inability to open new credit accounts with DMPs (not necessarily a bad thing), and varying impacts to your credit score in the case of DMPs and DSPs.

Credit Card Consolidation Example

Let’s walk through an example showing how consolidating your debt could save you money. For simplicity, we’ll pretend we’re doing the balance transfer card method (described above). But regardless of method, the basic concepts still apply.

Before Consolidation

After Consolidation

Credit Card #1 $5,000 balance Interest rate 20% Monthly Payment: $633 Credit Card #2 $5,000 Interest rate 10% Monthly Payment: $200 (minimum payment) Combined Monthly Payment: $833 Time it will take to pay all debt off: 29 months Total interest it will cost you: $1,037.26

Consolidated Balance Transfer Credit Card $10,000 balance Interest rate 0% Loan Term: 12 months Single Monthly Payment: $833 Time it will take to pay all debt off: 12 months Total interest it will cost you: $0 Note: In this example, even if the best interest rate you’re able to secure is 3%, by paying only $14 more per month ($847), you would still be able to pay off the loan in 12 months and only pay $161.14 in total interest. Not bad!

When you’re ready to try this with your numbers, we recommend this debt payoff calculator from Bankrate.com.

Personal Factors Affecting Debt Consolidation

Debt consolidation isn’t just mathematical. Your individual credit score and your personal psychology matter too.

• Credit Score: In the Foundations tier, we’ve covered what a credit score is, the factors that impact it, and how to check it. And when it comes to debt consolidation, your credit score matters. To secure a 0% balance transfer fee and a 0% introductory interest rate, you’ll likely need a credit score approaching the mid 700’s or better.
  

  It’s certainly possible to have high-interest debt and also have a good credit score. But if you’re not there yet, focus on on-time payments and other factors to improve your score.

  As described in the example above, you can still save a lot of money with a low but not 0% interest rate. But just be aware of how long your low introductory interest rate is meant to last and what it will jump up to after that period ends.
  

• Psychology: When you choose to consolidate, you are opening a new loan or a new line of credit. Therefore, it’s important to ask yourself: Do I have the discipline to use this new loan to pay off old loans and also not to acquire new debts on this new line of credit? If you find yourself hesitating for even for a second, consolidation might not be a good choice for you. You may end up taking on even more debt and making your situation worse.
  
  Another question to ask yourself: Do I have the ability and discipline to pay my new loan off before or soon after my introductory interest rate ends (or by the end of the loan term)? It’s important to be realistic about what you can afford. We’ll show you exactly how to calculate your numbers in the next steps.
  
  For a balance transfer card, if you think it may take you longer than the period your introductory interest rate will last, but your new interest rate won’t be any higher than the average of what you’re paying now, you won’t be worse off (assuming you don’t take on new debt). But don’t forget: the more you are able to pay down while your interest rate is low, the more you’ll save.
  
  For loans with specific term lengths (e.g. a personal loan), the required payoff date may be part of your loan agreement so you’ll want to be really confident you can hold up your end of the bargain.
• Pro Tip – Debit Cards: If you believe you can meet your needs with your income but tend to have a habit of buying things you want on credit, consider only using debit cards while you pay down your credit debts. Cut up your physical cards (you can always get new ones when you need them) and take them out of your mobile wallets or automatic payments for any subscriptions you have. This will ensure you don’t add new credit debt to what you’re trying to pay off.

Ready to Consolidate?

If you’ve read all the above and it sounds like consolidation is a good idea for you, continue with the Debt Consolidation Checklist in your MoneySwell plan (available to logged in users).

If you’ve determined consolidating your debt is the right step for you, complete the subtasks below. Once all the subtasks are complete you can mark this task complete as well.

Subtasks

1. Crunch Your Numbers
2. Compare Loan & Card Offers
3. Apply for Loan or New Line of Credit
4. Track Your Progress with Budget Planner