If someone has multiple debts, they may be unsure which debt to pay off first. Paying off high-interest debt first can be a smart move depending on a person’s financial situation. They can even consider taking out a debt consolidation loan to simplify the process. Keep reading to find out why paying off high-interest debt is so important.
Reasons to Pay Off High-Interest Debt First
While focusing on high-interest debt first isn’t right for everyone, it is a solid choice for many people. Here are some of the benefits of doing so.
Interest Savings: There’s no denying that high-interest debt is expensive. The higher the interest rate, the more money the borrower spends over the life of their outstanding loan or credit card balance. Unless credit card users pay off their balance in full every month, depending on what kind of balance they accumulate that’s subject to high interest, they may steer themselves into a vicious cycle of debt that could cost thousands or even tens of thousands of dollars in interest expense. Paying off high-interest debt first can save some serious cash.
Less Stress: Since most borrowers know how much more high-interest debt costs, paying it off first can alleviate a lot of stress. As they pay down their high-interest debts, borrowers may feel less overwhelmed and better about their current financial situation and future.
How to Pay Off High-Interest Debt
The debt avalanche strategy is the easiest and most effective way to pay off high-interest debt. This method is designed to save the most money in interest charges over time. Here’s how borrowers can take advantage of this strategy.
- Make a list of all debts and order them from the highest interest rate to the lowest.
- Put as much extra money as possible toward paying the debt with the highest interest rate after paying the minimum monthly payment on all the other debts every month.
- Once the debt with the highest interest rate has been paid off, move on to the debt with the next highest rate. Take the extra money they had used to pay off the first debt and add it to the minimum payment on this debt until it’s gone, still making sure to first pay the minimum monthly payment due on all the other remaining debts .
- Repeat this process until all the debts have been paid off.
Debt Avalanche Example
Let’s say a borrower has high-interest credit cards with the following balances and interest rates.
$800 at 29.29% APR
$700 at 26.88% APR
$500 at 24.18% APR
With the debt avalanche strategy, the borrower would make minimum payments on all their debts except the card with the $800 balance because it has the highest interest rate. They’d try to put as much as possible toward that card until they’d pay it off. Then, they’d move on to the $700 debt and $500 debt.
Bottom Line
Borrowers concerned about paying too much interest should tackle their higher-interest debt first. Depending on their current interest rates and balances, as well as how quickly they pay it down, they may save hundreds or even thousands of dollars in the long run.
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