How to Prioritize High Interest Debt Payments
The debt repayment board usually advises to pay off the debt at high interest rates first. But what actually counts as high interest debt? Is it enough to just look at the numbers on different accounts? Yes, but there are additional details that are useful to note.
The simple truth is this: the higher the interest rate, the harder you want to work to pay off that debt as soon as possible. But you also need to consider the type of debt you are dealing with.
Is your debt revolving or based on installments?
Credit card debts are some of the most expensive to pay off because they are renewable. You don’t just borrow one dollar as a loan – you have access to a constant stream of credit. And there is no one to cut your spending until you reach your credit limit.
It is rare to see a credit card with an interest rate below 10%; the average is now around 16%, according to CreditCards.com . Your credit rating and the type of your card are factors in how the credit card companies determine your interest rate. According to Valletuba, for people with credit cards in the mid-600s, the average interest rate on credit cards was 23.4%, while on store cards the average interest rate was 25.4%.
Credit cards usually have the highest interest rates than other debts, and their “revolving” status can make it difficult to predict your payments from month to month. Your minimum payment depends not only on your interest rate, but also on how much you spent. And as soon as your interest is added to your expenses, the interest increases, meaning you get accrued interest on your interest . It builds up until you stop it by stopping spending and paying your balance in full.
Although you may have a lower credit card balance than other debt, such a high interest rate can quickly sneak up on you. Start with credit card debt if you want the biggest impact on your financial health right away.
If you are considering loans (mortgage, car, student, personal, etc.), your debt is most likely broken down into neat payments. If so, read on to find out how to prioritize these debts.
Is your interest simple or complex?
What about other debts, such as loans? Again, this depends on the type of loan and how the interest is calculated.
Interest rates on personal loans can be around 5-35%. If you have excellent credit (above 720), you are probably counting on 12% or less. Is the “good” loan somewhere between 690 and 719? You’re likely to get bids in the 13-15% range, Bankrate says.
Car and student loans often have lower interest rates, and federal student loans offer the lowest rates of all. If you have several different debts with the same interest rate ranges, see how interest works.
If you have a loan that carries simple interest, you will be able to see your entire payment schedule (this may be listed as a “repayment schedule” on your loan documents), with a neat breakdown of each installment as it is repaid. period.
But some loans (like mortgages and student loans) charge compound interest, which means that even if you make the same payment every month, interest will go up.
Therefore, if you want to have the greatest impact on paying off your loans, start with those that have compound interest versus those that charge simple interest.
Are you completely confused? Go back to the 5% rule
Not sure what your debt is? You can always ask your lender questions about the type of loan and how interest is calculated.
And if you’re feeling stuck in the details, go back to the numbers: the interest rates on each of your debts. Anything above 5% has priority. Anything below 5% you can keep making minimum payments and sort it out later.
It’s all about the 5% investment rule, which determines whether you should accelerate debt repayment or focus on investing. If the interest rate on your debt is below 5%, your money in investments will grow faster than the money you save on paying off the debt.
But now you don’t worry about investments – just debt. If you are considering debt with an interest rate of 5% or higher, consider it high and focus on tackling it in the order that works for you, following the guidelines above.
Looking for ways to protect black lives? Check out this list of resources .