What Is High-Interest Debt?

You may have heard that you should avoid debt at all costs. But that's not always realistic—or even beneficial. 

Many of us can't afford to buy a home outright, so we finance a home by signing a mortgage. And given the cost of even a used car these days, it's not unusual to finance a vehicle purchase and pay it off over time.

Any time you take on debt, make sure you can afford the payments. It's especially important to be careful with high-interest debt. Let's review what counts as high-interest debt, why it's often dangerous, and some popular strategies to help you pay it off. 

What Is High-Interest Debt?

High-interest debt refers to debt with an interest rate higher than the average. Often, high-interest debt means a double-digit APR. 

There's no single cutoff that propels debts into the high-interest category. But as an example, the average 30-year mortgage rate as of this writing is 6.06%. The average credit card APR is 23.79%. This means you may be looking at four times the interest rate on a credit card than on a mortgage.

Often, unsecured debt carries a higher interest rate than secured debt. Unsecured debt is debt that isn't backed by collateral, or something of value you own. The lack of collateral makes unsecured debt more risky for the lenders, since they can't take your collateral if you stop making payments.

When you carry high-interest debt, more of your payment goes toward the interest fees instead of reducing your balance. This can easily leave you trapped in a cycle of debt for a long time.

Common Types of High-Interest Debt

Technically, any type of debt could be considered high-interest. For example, the average auto loan rate for a new car as of this writing for borrowers with outstanding credit is 4.88%. For borrowers with poor credit, it's a much-higher 15.85%. 

Still, certain types of debt tend to fall into the high-interest category for most borrowers. Here are a few examples. 

Credit card debt

Credit cards are notorious for charging a lot of interest. And because credit cards typically compound interest on a daily basis, the amount you owe can add up quickly. 

Worse, credit card minimum payments are designed to pay your interest fees down—not your balance. If you're only making minimum payments, the high interest rates could keep you in debt for a long time.

Payday loans

Payday loans are short-term loans designed to be repaid with your next paycheck. They tend to come with extremely high interest rates, and people tend to turn to them when they're desperate for quick money. This is one of the most expensive ways to borrow, with the high fees often equaling an equivalent APR over 300%—far above even the highest-rate credit cards.

Personal loans

Personal loans can be an affordable way to borrow. But if you don't have the best credit, you may find that the interest rate on a personal loan can get very high. 

A big part of the reason the fees can get high is that most personal loans are unsecured, so they're not tied to an asset the lender could take and sell if you don’t make payments. For this reason, they can be riskier for lenders, and so they could come with very high interest rates for borrowers with poor credit.

Store credit cards

Store credit cards often offer the benefit of rewards or cash back on retail purchases. But if you think regular credit cards have high rates—store cards are often worse. 

Since most can't be used outside the store in question, however, they can be easier to get than regular credit cards. The combination of high rates and easy approval makes them a potentially dangerous way to borrow.

Why High-Interest Debt Is Hard to Get Rid Of 

The problem with high-interest debt is that the more interest you're charged, the more it costs you over time. But there's more to the story.

With credit card debt in particular, a big part of the problem is that you only have to make a minimum monthly payment. This can create a cycle in which the money you pay toward your debt each month goes toward interest only, not principal. As a result, you might struggle to make any progress toward your balance.

How to Pay Off High-Interest Debt

If you're carrying high-interest debt, aim to break that cycle and pay it off as quickly as reasonably possible. Here are some strategies for tackling it.

Pay More Than the Minimum

When you only pay the minimum amount on your credit card, it can extend your repayment window—sometimes for years—and cost you significantly more in interest over time. If you want to get ahead of your high-interest debt, make more than your minimum monthly credit card payments. 

Better yet, make those payments as soon as possible. Interest on credit cards is calculated based on your average daily balance, so the sooner you pay a portion of your principal balance, the less interest builds up over the month.

Figure Out a Debt Payoff Method That Works for You

The avalanche method and snowball method are two popular debt payoff options that help you prioritize multiple debts. For both, you start by making all of your minimum payments. Then, you focus any extra cash on one card at a time.

The avalanche method has you prioritize your cards in order of highest interest rate to lowest. This method often saves you the most money.

The snowball method has you pay off your debts in order of smallest balance to highest. With the snowball method, you can potentially eliminate some debts relatively quickly. Seeing those debts disappear could keep you motivated to continue paying off debt. 

The snowball method may not save you as much money as the avalanche method, but the quick win of paying off small balances could help you stay motivated. If you're someone who gets frustrated when you don't see a professor, the snowball could be worth using.

Consider a Debt Consolidation Loan

If you're juggling a lot of high-interest debt, you may want to consider debt consolidation. Debt consolidation rolls multiple debts into a single loan with one monthly payment. In the process, you could reduce the interest rate on your debt 

Personal loans often have lower interest rates than credit cards, especially if you have decent credit. While they can also have origination fees, if your interest savings are high enough it could still be a big win.

When High-Interest Debt Becomes Overwhelming

If you're struggling to pay off your high-interest debt due to financial hardship, you could also consider a debt relief company for debt settlement. This involves negotiating with creditors to accept less than you owe and forgive the rest. 

Debt settlement generally works only for unsecured debts, and it could have tax implications so consult a tax professional. But you don't need to apply for a new loan, and it doesn't require a strong credit score. This may be worth doing if you feel overwhelmed by your debt and don't see a path out. 

No matter which strategy you choose, you have options—and the power is in your hands. Take control of your debt and start moving forward.