The Hidden Costs of Debt: How Interest Rates Impact Your Financial Health
The average American owes about $6,000 in credit card debt. As a society, we have normalized debt, and many people owe far more. It’s easy to come to see your credit limit as money you have and can freely spend.
Debt has, though, significant costs that can impact your financial freedom. If you only ever pay off the minimum, then your debt will only build.
Here's what you need to know.
How Much Interest Do You Pay?
Credit cards have an annual percentage rate (APR) that is higher than any other form of debt because credit cards are unsecured. In fact, the average rate as of November 2023, was 22.75%. That’s over one fifth! If you keep a balance of $1,000 on your card, by the end of the year, you will owe $1,200. Your credit score impacts the rate you get…a good credit card score means a better rate, but usually still north of 16%.
Additionally, owing continuous debt whittles away at your score. Also, if you miss a payment, you will then owe the penalty APR, which is even higher, typically 29.99%.
To put this into perspective, the average rate for a 30-year fixed mortgage is 7.38%, and the typical interest rate for a secured loan for a new car is 7.18%. Because of this, it’s sometimes helpful to take out a second mortgage or home equity loan and then use that to pay off your credit cards, dropping the interest rate on that debt by a significant amount.
Here's what you need to know.
How Can You Reduce Your APR?
The best option is, of course, to pay off the debt as quickly as possible. If, however, you owe more than you can afford, then you may need some help.
Debt consolidation is the second option. The goal here is to consolidate all of your debt into a loan with a lower APR…which also reduces the number of bills you have to juggle each month. Some people use a balance transfer card for this…by transferring multiple credit cards onto a balance card with a 0% introductory APR, you can knock your debt out…or significantly increase it. Only do this if you know you can pay it off before the interest rate rises again and make sure you budget for a monthly payment you can afford.
Debt resolution is the third option. A debt resolution company will negotiate with your creditors on your behalf to resolve your debt for a lower amount than what is owed, resulting in significant savings and expedited freedom from the debt. Always work with a qualified and accredited Certified Debt Specialist. Using a fly-by-night service that promises to make all your debt go away can leave you stranded in a worse situation.
Once you have your debt paid off, then consider steps to improve your financial wellness. Getting rid of credit cards to prevent overspending temptations and creating a sensible budget are two steps in the right direction. If you have high levels of credit card debt, are staring down massive interest, and feel like tackling it by yourself is overwhelming, contact the experts DebtBlue. Our compassionate team can work with you on a plan to pay down your debt and regain financial health and freedom.