Photo (cc) by Alan Cleaver
Stuck in a debt hole is no place to be. And it’s hard to get out when a 15 percent interest rate is digging you deeper and deeper. That’s the subject of today’s reader question. See if you can relate…
I have been paying my chase freedom card faithfully for years. I always pay the minimum or more. The interest is 15.24 percent. My only way to get this balance down is a balance transfer which I’m having trouble doing: Any suggestions?
Before I get to Joanne’s question, it’s time for this week’s musical interlude. It’s a song called “Debt” from country singer Brenn Hill. Check it out, then meet me on the other side for advice that might help Joanne, this singer, and anyone else struggling with debt…
Although I’m not normally a country music fan, that song seemed to summarize where so many of us find ourselves today. Hope you liked it. Now, on to business!
How to get rid of high-interest debt
Joanne has a common problem – she’s paying so much in interest, it’s hard to make progress on her debt. Take a look at the Federal Reserve’s credit card calculator and you’ll see the difference high interest rates make.
For example, suppose you’ve got a $10,000 debt and pay 15 percent interest. If you pay $250/month, you’ll pay the card off in five years and pay about $4,000 in interest. But lower the interest to 10 percent, and the same $250 will pay the card off in only four years, with an interest tab of $2,215. The lower rate saves you nearly $2,000 and a year of debt.
Here’s the step-by-step to get rid of high-interest debt…
Step 1: Find the source of the problem
There’s only one way to create debt: spend money you don’t have.
Sometimes debt is necessary – even desirable. For example, not many people can pay cash for a house, and a home can increase in value by more than the cost of the mortgage interest. An education can also return more in lifetime income than it costs in student loan interest. So debt isn’t always bad.
But if you find yourself in Joanne’s situation – perpetually paying 15 percent interest on a balance that never seems to go away – it’s time to ask yourself a question. Namely, why? Why are you paying interest? Why are you borrowing money? Why are you spending money you don’t have?
You can’t fill in a hole if you’re still digging it. If you’re borrowing money because you’re spending more than you’re making, finding a lower interest rate is a band-aid, not a cure. So Step 1 is to step back. Track your income and expenses with a spending plan, otherwise known as a budget. If you find your outgo regularly exceeds your income, the only solution is to either spend less or make more. Fix that first.
Step 2: Find a lower interest rate
Once you’ve plugged your spending leaks and are living within your means, destroy your debt faster by refinancing it at a lower rate. Here are some possibilities…
- Pay zero interest with a promo rate. According to in-house credit card expert Jason Steele, the Slate card from Chase is now offering a credit card with a zero-percent interest rate for 15 months, and no fee to transfer the balance. If Joanne has a $10,000 balance, makes $250 minimum payments, and pays zero interest, in that one-month period she’d pay off $3,750. After the promo period, however, she’ll be back at a rate similar to what she has now. But then she could switch again to a…
- Lower-rate credit card. Joanne could use any number of credit card searches, including ours, to find lower-rate plastic. For example, the lowest rate on our credit card page is IberiaBank’s Visa Classic. Depending on her credit score, she could get a rate as low as 7.25 percent. Paying $250/month with that rate would pay off a $10,000 balance in four years. The total interest she’d pay would be $1,482 – less than half what she’d pay at 15 percent. Another idea? Forget credit cards entirely and use a…
- Home equity line of credit. Home equity lines of credit – a credit line secured by the equity in your home – offer two advantages over credit cards. They typically have lower interest, and that interest can be tax-deductible. Our home equity rate search reveals the Pentagon Federal Credit Union offers rates as low as 3.75 percent. That’s pretty low. And if Joanne doesn’t have any equity? Then she could always…
- Check out a credit union. Credit unions typically offer lower rates on all types of loans than banks. Joanne might be able to borrow enough on a low-interest signature loan (an unsecured loan) to pay off her credit card. She might find other types of financing, including lower-interest credit cards, here as well. She can find one here.
Step 3: Destroy your debt and don’t let it return – ever
Every dollar you pay in interest is a dollar lost. It makes you retire later. It separates your kids from an education. It prevents you from starting your own business. In short, it converts your dreams to some bank’s bottom line.
Don’t be like Brenn Hill and sing the blues. Spend less than you make, list your debts, make a plan to pay them off, refinance them at the lowest possible rate, pay them off, and don’t ever allow that to happen to you again.
Got more money questions? Browse lots more Ask Stacy answers here.