How to Pay off High Interest Rate Debts
If you have a large balance on a high-interest rate credit card, paying off the balance can be difficult. That’s because the monthly finance charges eat up your minimum payment and the balance only goes down a small amount every month. Though paying off higher interest rate debts first is the way to save money in the long run, it may not be the best method for your finances.
The chart below shows the ratio between debt and interest accrued, and much you'd need to pay off over time.
Ask for a Lower Interest Rate
Creditors are sometimes willing to lower interest rates, but usually for the best cardholders – the ones that have always paid on time or have only missed one or two payments. If you’re getting offers for other credit cards with lower rates, you can use those offers as a bargaining chip.
Transfer the Balance to a Low-Interest Rate Credit Card
A few interest-free months may be all you need to pay off your balance. With excellent credit, you may qualify for a good balance transfer interest rate. Don’t limit your search to balance transfer credit cards. Some of the best balance transfer rates are on reward credit cards. And if you don’t have enough available credit to transfer an entire balance to a single credit card, moving just some of it will lighten the load.
Tackle Smaller Debts First
Getting rid of high-interest rate debt first may not be the best strategy for you. Paying off some smaller balances would free up money to put toward your larger, high-interest rate debts. Make a list of your debts to figure out which can be paid now and which must wait. As you get rid of small credit card balances, don’t forget to put that same monthly payment toward another credit card balance.
Pay as Much as You Can
Because so much of your monthly payment goes toward interest, you have to increase the number of your payments if you want to make noticeable progress toward paying off high-interest rate debts. You'll be more successful if you pay the minimum on all your other debts and put all your extra money toward a single high-interest rate debt. Once you've paid off one debt, you can work on the debt with the next highest interest rate, and so on, until you've paid all your debts.
Disconnect your cable. Cut back on eating out. Reduce your cigarette smoking. Cut back on coffee and sodas. Decrease your cell phone plan. Squeezing more money out of your budget gives you more to put toward your credit card debt. If you turn off cable television, you could have an extra $60 to put toward your credit card debt. Eat out one less time a month, and that’s an extra $30. Combined, that’s almost an extra $100 on your monthly credit card payment.
Wait a Few Months
If you absolutely cannot squeeze any extra money from your budget and you can’t produce any extra income, you may have to delay your debt-free goal for a few months. Keep making minimum payments on your credit cards because that will keep your credit score from slipping and it will keep your debt from growing. Yes, you’ll be throwing away money on interest, but if you can’t afford to pay off your high-interest rate debt right now, then you simply can’t afford it. Wait two or three months, reassess your budget and expenses to see if anything has changed.
Get Credit Counseling
Depending on your debt, income, and expenses, a credit counselor may be able to enroll you in a debt management plan. On a DMP, your creditors lower your interest rate and monthly payment. The catch is that you can’t use your credit cards while you’re on the DMP (not that you should use them anyway) and a note goes on your credit report stating you worked with a credit counselor. You can take advantage of the lower interest rates by sending larger monthly payments and asking the credit counselor to apply the additional payment to your highest rate first.