Paying off high-interest debt isn’t easy, but tackling it head on will help you build a strong financial foundation for the future. Learn about high-interest debt and the simple strategies you can use to pay it off.
What is high-interest debt?
High-interest debts are debts which have an interest rate above the average rate on the market. In general, anything above 5% interest can be considered ‘high’ – but some credit cards can have a much higher interest rate, like 25%. High-interest debt can include all types of financial products, but the highest interest products are usually credit cards, personal loans or payday loans.
How does high-interest debt affect your finances?
High-interest debt can be expensive to manage and difficult to pay off, if it accounts for a large chunk of your monthly outgoings. High-interest debt can also negatively impact your credit score, which lenders assess to get a picture of your overall financial health.
Having a low credit score or a ‘high credit utilisation ratio’ (using too much of your available credit) can hold you back from achieving your financial goals. This can stand against you when you’re applying for financial products, like mortgages. Lenders will check to see that you can manage credit responsibly, so it’s really important to sort out your debts before you buy a home.
How to pay off high-interest debt
When it comes to paying down high-interest debt, having a plan and sticking to it is crucial. There are a few different strategies you can use to pay down or pay off your debts. Here are the three most common:
- Pay off the highest-interest debt first – You could start by paying down the debt that’s costing you the most first – the loan or card with the highest interest. This is a great way to quickly feel the financial benefit of paying down your debts.
- Try “the Snowball method” – You could start by paying off the card or loan with the smallest balance first, then tackle the next smallest, until all your debts have been paid off in full. This is known as the “Snowball method” and can help to give you a sense of accomplishment and motivation as you go.
- Switch to a 0% balance credit card – You may be able to transfer your credit card balances onto a 0% balance credit card for a set period of time. This could really help you make headway on your credit card debt, without interest charges continuing to mount up. Remember to check the terms first.
Whichever strategy you choose, our top tip is to not bury your head in the sand when it comes to high-interest debt. Help is always out there, and lenders are much more sympathetic to people who let them know they’re struggling with payments before it’s too late. You can write to them and ask them to temporarily stop adding interest charges, or put your payments on pause while you make a plan.
If you need support from someone impartial, the debt charity StepChange is an excellent resource for free advice, and can give you a tailored plan to help you get back on track.
Once you’ve sorted your debts, it’s time to start building your savings! Let’s move onto Step 2 – Building an emergency fund.