High-interest debt can feel like a heavy weight, keeping you from reaching your financial goals and constantly draining your resources. Even if you consistently make the minimum payments, a significant portion goes towards interest, making it difficult to make any progress on the principal — or original debt.
Fortunately, there are strategies and tools you can use to manage and pay off high-interest debt more efficiently. Below, we walk you through what qualifies as high-interest debt, how it impacts your finances, and practical methods to help you tackle it head-on.
Table of Contents
Key Points
• High-interest debt, such as credit cards, can significantly increase borrowing costs and hinder financial goals.
• High balances and missed payments can negatively affect credit scores, leading to higher future interest rates.
• Refinancing and balance transfers offer ways to reduce interest rates and pay off debt faster.
• The avalanche payoff method targets high-interest debts first to minimize total interest paid.
• The snowball payoff method focuses on smallest debts to build momentum and motivation.
What Is Considered High-Interest Debt?
High-interest debt generally refers to any loan or credit product with an interest rate significantly above average. While there’s no universally accepted definition of “high interest,” generally speaking, any annual percentage rate (APR) in the double-dibits is considered high.
The most common sources of high-interest debt include:
• Credit card debt: As of May 2025, the average credit card interest rate was 22.25%, but you may see rates as high as 25%.
• Payday loans: These are short-term, high-cost loans, typically for small amounts (often $500 or less), that are due on your next payday. Fees typically run around $15 per $100, which equates to an APR of almost 400%, according to the Consumer Financial Protection Bureau. This makes payday loans one of the most expensive forms of borrowing.
• Store credit cards: Store-only credit cards charge an average of 30.24% APR, substantially higher than the average interest rate on general-purpose credit cards.
• Personal loans for bad credit borrowers: Lenders typically charge higher interest rates — often 30% APR or higher — on personal loans for borrowers with poor credit primarily due to increased risk.
Unlike mortgages or student loans, which tend to have lower, fixed interest rates, high-interest debts can grow quickly if not managed, making them harder to pay off over time.
đź’ˇ Quick Tip: With low interest rates compared to credit cards, a personal loan for credit card consolidation can substantially lower your payments.
How High-Interest Debt Can Dent Finances
High-interest debt doesn’t just make it hard to stay on top of bills, but can have a ripple effect on nearly every aspect of your financial life. Here’s a look at the potential fallout:
• Increased costs over time: The higher the interest rate, the more you pay in interest over the life of the loan or credit balance. For example, carrying a $5,000 credit card balance at a 22% APR and only making minimum payments could result in paying thousands of dollars in interest on top of what you originally borrowed.
• Slower progress toward goals: When large chunks of your income go toward interest payments, there’s less money left for savings, investing, or major purchases like a car or a home. High-interest debt can delay financial goals such as building an emergency fund, starting a business, or saving for retirement.
• Credit impacts: High balances relative to your credit limit can negatively affect your credit utilization ratio, a key factor in credit scoring. Missed or late payments can also damage your credit, which can lead to even higher interest rates in the future.
• Emotional stress: Living under the constant pressure of unmanageable debt can lead to stress and anxiety. Financial insecurity can also negatively impact your relationships and overall well-being.
How to Pay Off High-Interest Debt
Tackling high-interest debt takes commitment, planning, and sometimes a little help. Here are some effective tools and strategies to consider.
Refinancing
Refinancing involves replacing one loan with another, ideally one that has a lower interest rate. Two popular options for refinancing high-interest debt are:
• Personal loans: Interest rates on personal loans are generally much lower than credit cards, especially if you have good credit. If you can qualify for a competitive rate on a personal loan for debt consolidation, and use it to pay off your high-interest debt, it could help you save money and potentially pay off your debt faster.
• Home equity loans or lines of credit (HELOCs): If you own a home, borrowing against your equity can provide access to low-interest funds to pay off high-interest debt. Just keep in mind that these are secured loans, meaning your home is used as collateral. Should you run into trouble repaying your loan or credit line, you could risk losing your home.
To determine if refinancing is worth it, you’ll want to compare loan terms carefully and check for any fees or penalties, which can add to your costs. An online debt consolidation calculator can help you determine exactly how much you could save by refinancing high-interest debt with a lower-interest loan.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
Balance Transfer
A balance transfer involves taking out a new credit card, ideally one with a 0% introductory APR, and using it to pay off your current credit card balances. This can be an excellent tool for saving on interest, if used wisely. However, there are a few caveats to keep in mind:
• Balance transfer cards usually charge a 3.0% to 5.0% transfer fee on the transferred amount. So for every $1,000 you transfer, a 4.0% percent balance transfer fee would cost $40.
• If you don’t pay off the balance within the promotional period (which can be anywhere from 12 to 21 months), the interest rate will jump, potentially undoing your progress.
• You typically can’t transfer balances between cards from the same bank.
• You generally need a good credit score to qualify for the best balance transfer offers.
Credit Counseling
Working with a nonprofit credit counseling agency can be a good way to get free or low cost help with managing high-interest debt.
General credit counseling and budgeting advice is often free. For a small fee, a counselor can also set up a debt repayment plan (DMP). If you sign up for a DMP, your counselor will negotiate with your creditors on your behalf to lower interest charges and fees, and come up to a manageable repayment plan. You then make a single monthly payment to the agency and they distribute payments to your creditors.
A DMP typically requires closing your credit accounts and you usually can’t access new credit during the plan.
Common Debt Repayment Strategies
If you want to tackle your debt on your own, it’s important to take a systematic approach. “Focus on paying off one debt at a time,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “If you spread your money out over many debt payments, your progress may not be as fast as you want. But by focusing on one goal at a time, you can see success sooner — and that can keep your motivation up.”
Two popular debt payoff strategies — the avalanche and snowball methods — offer different psychological and financial benefits. Here’s how they work:
The Avalanche Method
With the avalanche method, you list your debts in order of interest rate then make extra payments on the debt with the highest rate, while continuing to pay the minimum on the rest. Once that debt is erased, you funnel your extra payments towards the debt with the next-highest interest rate, and so on. This approach helps you save money on interest over time, but it can take longer to see results.
The Snowball Method
With the debt snowball method, you list your debt in order of size, ignoring interest rates. You then focus extra payments on the debt with the smallest balance, while making minimum payments on the rest. Once that debt is paid off, you roll its monthly payment to the debt with the next-smallest debt, and so on, creating a “snowball” effect.
This strategy helps you build momentum and motivation as you eliminate entire debts faster, but may cost more in interest compared to the avalanche method.
The Takeaway
High-interest debt may be daunting, but it’s not unbeatable. With the right combination of tools, you can take control of your finances and move toward a debt-free future.
Whether you opt for refinancing, a balance transfer, credit counseling, or a DIY payoff approach, the key is to start now, stay committed to your plan, and remember that each payment moves you one step closer to financial freedom.
FAQ
What is an example of high-interest debt?
A common example of high-interest debt is credit card debt. Many credit cards carry annual percentage rates (APRs) topping 20%, especially for those with lower credit scores. Due to compounding interest, balances can keep growing if you only pay the minimum due each month. Payday loans and personal loans for bad credit borrowers are also considered high-interest debt. These loans often feature extremely steep rates that can trap borrowers in a cycle of ongoing payments.
How can I prioritize high-interest debt over other financial goals?
To prioritize high-interest debt, start by creating a budget that allocates extra funds toward these debts while covering essentials. Consider using the avalanche payoff method, which prioritizes paying off debts with the highest interest rates first. While saving and investing are important, aggressively tackling high-interest debt can free up more money in the long run and improve your financial stability.
Does consolidating high-interest debt hurt your credit score?
Debt consolidation can cause a temporary dip in your credit score due to a hard credit inquiry and the opening of a new credit account. However, if managed responsibly, it can have a net positive impact on your credit file over time. By simplifying payments and potentially lowering your interest rate, consolidation can help you build a positive payment history, a key factor in your credit score. The long-term effect on your score largely depends on how well you manage the new loan.
Are personal loans a good option for high-interest credit card debt?
Yes, personal loans can be a smart option for paying off high-interest credit card debt. They typically offer lower fixed interest rates and a set repayment term, making monthly payments more predictable. This can help you save on interest and potentially pay down debt faster. However, it’s important to compare lenders, watch for fees, and avoid racking up new credit card debt after consolidation. Success depends on disciplined repayment and budgeting habits.
How long does it take to pay off high-interest debt with a structured plan?
The time it takes to pay off debt with a structured plan varies based on your total debt, repayment strategy, and how much extra you can pay monthly. Using a formal debt management plan offered by a credit counseling agency, many people become debt-free in two to five years. Larger debts may take longer, especially if you’re only making minimum payments.
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