Skip to main content

Why You Need To Prioritize High-Interest Debt

5 minute read

Rebecca Henderson

By Rebecca Henderson

So many financial buzzwords attract our attention, but one stands out above the rest: “Free.”

It’s one of the many words and phrases we respond to when it comes to finances. Free trials, one-month free passes, and tons of other “free” offers riddle our inboxes, our physical mailboxes, and the colorful signage around us.

One of the most attractive phrases including the word “free,” however, has to do with lack of owing money. Yes, we’re talking about the phrase “debt-free.”

A debt-free life is one most of us strive for, even if we never quite achieve it. Even incredibly wealthy people still borrow money. They just do it smartly. Many equate no debt with a life of luxury. But did you know that having some debt can actually be good?

Spoiler alert: we won’t be talking about good debt in this article. However, we will discuss exactly how you can prioritize your debt so it works for you, not against you. Ultimately, prioritizing your high-interest debts is the first step in future financial success.

What Qualifies As High-Interest Debt

So how do we categorize debt? What is considered high-interest debt, exactly?

Beyond the good/bad system we mentioned above, you can classify your debt based on the interest rate attached to it. A higher interest rate typically means you’ll be paying more in the long run than you would on other types of loans. That may be self-explanatory in a way, but let’s put numbers to it.

NerdWallet labels any debt with an interest rate higher than 20% as high-interest debt. For perspective, that means you would owe someone $20 (or more) for borrowing $100. That’s a fifth of what you’re borrowing that you’d owe back in interest.

When you start putting time limits on that amount, however, and talking about simple vs. compound interest, things can start to get out of hand pretty quickly. For instance, those payday loans you’re always hearing about on TV? “They often come with interest rates as high as 300%,” cautions NerdWallet. That $20 you owed previously in interest would pale in comparison to $300 in payday loans’ interest — on a simple $100 loan!

Why You Should Prioritize High-Interest Debt

You might have looked at the figures in the last section and wondered, “If I had to borrow $100 from someone, how would I be able to pay off that amount and $300 more in interest as well? That’s $400 for a one-time $100 loan I couldn’t afford in the first place.”

This is exactly why you should prioritize high-interest debt. It’s an unsustainable situation. A small amount of debt soon turns into a large pile that strains your wallet and buries you under a mountain of interest. It can become nearly impossible to pay off at a certain point.

High-interest debt acts like financial quicksand. Struggle as you might, the debt keeps pulling you down further until you’re up to your neck in loans. Ignore it long enough and it could swallow you — and your assets — whole.

Don’t let the quicksand pit of debt snare you. Learn how to prioritize your debts and make the choices necessary to free your bank account from the burdens of high-interest debt.

How To Prioritize High-Interest Debt

For those who haven’t taken on high-interest debt yet, avoidance is key.

However, there are those of you who are continuing to read this article because you need help. You have high-interest debt and want to get out from underneath it. Yes, it’s possible to do so. However, it will take dedication, effort, and serious discipline. And some sacrifices. Experts offer a few methods for paying down high-interest debt to put you on the path towards a debt-free life.

Credit Utilization

Your credit limit is not to be confused with the amount of money you can borrow without consequences. You’ve heard of people maxing out their credit cards. The best behavior with your credit limit, however, is to use 30% or less of it. According to Experian, credit utilization is “the second most important factor in your credit score after payment history.” Even if you don’t plan on taking out a loan anytime soon, your credit will benefit greatly by limiting your use of it to less than 30%.

Maintaining a good credit utilization score will result in lower interest rates and better credit, should you find yourself trying to refinance a high-interest loan with a different lender.

Minimum Balance Due

Your credit card balance looms over you at hundreds (if not thousands) of dollars. However, your minimum payment looks much more doable. It could be as low as $25, even with a mounting balance. However, if you’re only paying the minimum balance due each month, your interest still racks up. Credit cards are usually one the higher interest rates most people have. Be sure to pay as much over the minimum payment as you can budget for. Even better, try to pay your credit card balance in full every month. You’ll end up paying way less interest overall.

Snowball and Avalanche Methods

Financial gurus speak of these two types of methods for paying down debt. In the avalanche method, you work on your highest interest debt first, paying that off first. After it’s gone, you go down the line until your smallest interest debt looks like a tiny flake in the wake of your debt-obliterating practices.

Alternatively, the snowball method works in the opposite way, knocking out lower balances due first. While the snowball method doesn’t take interest rate into account, there’s a satisfaction is closing out each smaller debt forever. Then you start chipping away at larger debts until they, too, are gone. Depending on your financial situation, either of these may work to your benefit.

Debt Consolidation

If you have a lot of debt, with varying interest rates, you might want to consider consolidating it. That will combine all the debt into one place, with a single monthly payment, and a singe interest rate. Assuming at least some of that debt was high interest, consolidating will save you some money in the long run. Obviously, that’s the selling point many debt consolidation firms take advantage of, but it can help organize your debt so you face one sum. You can read more about two common methods of debt consolidation — balance transfers and home equity lines of credit — on the Bank of America’s website.

Short Term vs. Long Term Planning

Doing the responsible thing and paying off bad debt can mean you won’t have much extra cash lying around. But ask yourself: do you want to enjoy things now and let your debt grow out of control? Or would you rather plan for a bright future and reap the benefits when you need them most? That mindset often provides the motivation you need to make those payments and prevent yourself from taking on more debt in the meantime.

Smaller Debts Lead to Bigger Rewards

Sit down with your finances today and come up with a plan to pay off high-interest debt. Take that step forward towards a better financial future by looking at your spending habits now. Where can you forego spending and avoid getting yourself into high-interest debt?

Tuning up your personal finances and freeing up extra money means investing in your future. It also can help relieve stress in the present. Because extra cash in the bank puts you in a perfect spot to make money, rather than shell it out like it’s free. Prioritize your financial freedom by paying down high-interest debt as soon as possible.

Man Holding Growth Chart in Hand

Shutterstock

Rebecca Henderson

Freelance Writer

Rebecca Henderson has a Master's in German and a Bachelor's in Creative Writing. She alternates her time between writing and working on a variety of motorized projects. Most recently, she and her boyfriend have been building a custom drift trike. Rebecca believes that language, love, and a life worth living are only the first ingredients to happiness.

Explore

How Much You Should Spend on an Engagement Ring and What To Look For Wedding Ring Around Rolled Up $100 Dollar Bill Financial Advice

How Much You Should Spend on an Engagement Ring and What To Look For

Spending three months’ worth of salary might be the rule of thumb, but is it necessary? That depends on a variety of factors, including your financial situation and your partner’s style. When it’s time to buy a ring, keep the 4Cs in mind: Cut, Color, Clarity, and Carats. Engagement rings can be marked up 600% […]

Read More about How Much You Should Spend on an Engagement Ring and What To Look For

8 minute read

Is Pinching Pennies The Ultimate Secret To Wealth? Financial Advice

Is Pinching Pennies The Ultimate Secret To Wealth?

I’ve always identified myself as a penny pincher. However, I wouldn’t necessarily say I’m proud of that label. Then again, I’ve never fully shied away from it either. After all, I credit my willingness to scrap and save for giving me courage to jump into the unknown of entrepreneurship when I started MoneyNing.com, all those years […]

Read More about Is Pinching Pennies The Ultimate Secret To Wealth?

8 minute read

Widow’s Pension: Everything You Need to Know Financial Advice

Widow’s Pension: Everything You Need to Know

Qualifying military members can set up a Survivor’s Benefit Plan (SBP) upon retirement. The SBP, along with standard Social Security, can be used by a widow to stay financially afloat. Both the deceased veteran and the surviving spouse must meet certain conditions to qualify for a SPB. The payment amount depends on a number of […]

Read More about Widow’s Pension: Everything You Need to Know

6 minute read

Reducing Debt: Is Your Debt Like a Yo-Yo Diet? Financial Advice

Reducing Debt: Is Your Debt Like a Yo-Yo Diet?

You’ve probably heard the term “yo-yo dieting” before. It’s the problem that many people face when they attempt to lose weight. They will make drastic, unsustainable changes to their exercise and diet plans. The weight drops off, they relax their diet and start skipping gym days, and the weight comes roaring back. Rinse, repeat, ad […]

Read More about Reducing Debt: Is Your Debt Like a Yo-Yo Diet?

9 minute read

Is Thanksgiving Being Taken Over by Consumerism? Financial Advice

Is Thanksgiving Being Taken Over by Consumerism?

One of my favorite holidays is Thanksgiving. It’s one of the simplest of holidays. You can celebrate it without a lot of fuss — and without the need for elaborate décor or expensive presents. Thanksgiving has long been considered a holiday mostly untouched by consumerism. After all, what is less consumer-based than gathering with family […]

Read More about Is Thanksgiving Being Taken Over by Consumerism?

7 minute read

Do You Truly Understand The Impact Of Your Financial Decisions? Financial Advice

Do You Truly Understand The Impact Of Your Financial Decisions?

Too often, we think of our financial decisions as being made in a vacuum. For example, we figure that the investment choices we make only affect us in terms of gains or losses. Or the decision to fund a 529 education account only means your child will have a better chance of making it through […]

Read More about Do You Truly Understand The Impact Of Your Financial Decisions?

7 minute read

Simple (But Not Easy) Tips for Financial Success Financial Advice

Simple (But Not Easy) Tips for Financial Success

Whether it’s through a blunt comment online, a gentle reminder in person, or just by the look on their face, people tell me the same thing all the time. “David,” they say, ” I already know everything you’re saying to me right now. I want to be financially free. I don’t need someone to rehash […]

Read More about Simple (But Not Easy) Tips for Financial Success

6 minute read

See all in Financial Advice