Are you currently in debt? Do you struggle to pay off debt or you’re having a difficult time increasing your savings?
Don’t fret, you’re not alone. According to an Equifax report, the average person owed about $22,837 in consumer debt at the end of 2017. At the current level of debt, it could take years to pay off debt and can cost the average person thousands in interest expenses every year.
The Cost Of High-Interest Debt
How much can the $22,837 in consumer debt cost the average person? Let’s assume that the debt is in the form of credit card debt with an annual interest rate of 20%. Based on the Credit Card Payment Calculator, if the average person just pays the minimum 3% ($685.11) each month, it’ll take 50 months (4+ years) to pay off this debt. The total interest cost will be $10,774.93, which is an additional 47.18% of the original $22,837 loan.
Pay Off Debt Faster By Lowering Interest Cost
Paying off your high-interest debts can be really painful as you may have to cut back on spending, find better ways to save money or increase your income. However, there are a few simple ways that you can follow to lower the interest cost of your debts without making any sacrifices. When you lower the interest cost for each payment, this means a higher percentage of each payment is being allocated to paying off the principal of your debt. As a result, your debts will be paid off a lot faster.
5) Transfer Your High-Interest Debt To A Low Interest Rate Credit Card
As of this writing, the lowest interest rate credit card according to Rates Supermarket is the American Express Essential Credit Card. The credit card has no annual fees and the annual interest rate is 8.99%. If you transfer your balance, the interest rate for the first six months will only be 1.99%
For simplicity sake, let’s assume that there is a balance transfer fee and it can be covered by the interest that you saved for the first six months. If you maintain the same payment of $685.11/month, your $22,837 loan can be fully paid off in 39 months. In addition, the total interest cost is only $3,536.49, a saving of $7,238.44.
4) Transfer Your High-Interest Debt To A Personal Line Of Credit
A better option than a low-interest rate credit card is a personal line of credit. Depending on your credit score and history, the interest rate on your personal line of credit may vary. However, the interest rate is usually better than the best low -interest rate credit card. For example, one of my personal lines of credit has an annual interest rate of 8.44%, let’s use this rate as an example.
If your $22,837 high-interest loan is transferred to this personal line of credit and the same payment of $685.11/month, it can be fully paid off in 39 months. It’s not any faster than the low-interest credit card option. However, the total interest cost is only $3,277.81, saving you an extra $258.68. Every dollar counts when you want to pay off debt as fast as possible.
3) Transfer Your High-Interest Debt To A Home Equity Line Of Credit (HELOC)
If you own a home and has more than 20% equity in your home, you can apply for a home equity line of credit (HELOC) to transfer your high-interest debt to your HELOC. The interest rate of a HELOC is usually the bank’s prime rate plus 0.25% to 0.50%. As of this writing, the bank prime rate is 3.7%. Hence, the interest rate on a HELOC can be around 3.95% to 4.20%. Let’s use the rate of 4.20% for our example.
If your $22,837 high-interest loan is transferred to a HELOC and you maintain the same payment of $685.11/month, it can be fully paid off in 36 months. This is a couple of months faster than the personal line of credit option. The total interest cost is only $1,488.54, saving you an extra $1,789.27 on the way.
2) Transfer Your High-Interest Debt To Your Mortgage
Another option for homeowners is to take out a higher mortgage loan to pay off your high-interest debt. This option can be done when you renew or refinance your mortgage. Once again, according to Rates Supermarket, the best 5-year fixed mortgage rate that you can obtain now is 3.44%. This is a slight improvement over the HELOC interest rate.
If your $22,837 high-interest loan is transferred to your mortgage and you maintain the same payment of $685.11/month, it can be fully paid off in 36 months. In terms of duration, it’s the same as the HELOC. However, the total interest cost is only $1,200.47, saving you an additional $288.07.
1) Transfer Your High Interest Debt Using The Credit Card Churning Method
This option also take advantage of the balance transfer to another credit card, but with a twist. Instead of applying for just one low-interest rate credit card, you will need to apply for four credit cards that allow you to do balance transfers. At Rate Supermarket, you can find a variety of credit cards that offer interest rates of 0% to 1.99% on balance transfer for up to ten months.
The idea is that you apply for the first credit card, do a balance transfer to take advantage of the low-interest rate. During this period, you still maintain your payments. Before the expiry of the low rate, you apply for another credit card and do a balance transfer again. Just rinse and repeat this process until your loan is fully paid off.
Let’s assume that you are able to apply for credit cards that charge you an average of 1.99% (transfer fee plus interest) and are able to transfer to a different card every time before the higher interest rate kicks in. By maintaining the same payment of $685.11/month, the $22,837 high-interest loan can be fully paid off in 35 months. This option only shaves one month off the mortgage option. However, the total interest cost is only $675.06, saving you an extra $525.41.
Just a note, this option may be the most effective way to pay off debt a lot faster, but it comes with some risks. If you are not able to transfer the balance in time, it may cost you some money. Hence, be sure to read all the fine prints and ask lots of questions before you use this option to pay off debt. Ensure that you are comfortable with the risks, otherwise, chose other options that are less risky for you.
| Debt Payment Options | Loan Amount | Interest Rate | Payment | Months To Payoff | Total Interest Cost | Savings |
|---|---|---|---|---|---|---|
| High-Interest Debt | $22,837 | 20.00% | $685.11/month | 50 | $10,774.93 | $0.00 |
| Low-Interest Credit Card | $22,837 | 8.99% | $685.11/month | 39 | $3,536.49 | $7,238.44 |
| Personal Line Of Credit | $22,837 | 8.44% | $685.11/month | 39 | $3,277.81 | $7,497.12 |
| Home Equity Line Of Credit | $22,837 | 4.20% | $685.11/month | 36 | $1,488.54 | $9,268.39 |
| Mortgage | $22,837 | 3.44% | $685.11/month | 36 | $1,200.47 | $9,574.46 |
| Credit Card Churning | $22,837 | 1.99% | $685.11/month | 35 | $675.06 | $10,099.87 |
Table #1: Interest Saving Summary.
Interest Saving Summary
By looking at the summary table above. High-interest debts can cost you an extra 47.18% in interest cost in addition to the loan. It takes about 15 months longer to pay off compared to the most efficient option. Just by lowering your interest cost and without sacrificing anything, it’s possible to shave 15 months off the debt payment schedule for the average person. In addition, the best option can potentially save the average person $10,099.87 in interest cost too.
If you like this post, do it to Pinterest or follow me on Pinterest
My Two Cents
To pay off debt, some people prefer to choose the most motivating debt payment method to keep them on-track but they ignored the interest costs of their debt. By focusing on lowering the interest cost of your debt, you’ll be able to save more money and accelerate the amortization of your loan. Hence, you’ll be able to pay off debt a lot faster.
So readers, when it comes to paying off your debt, what debt payment method do you use? What factor do you focus on to pay off debt faster? Do share your success stories.