High interest debt: How to manage and pay it off quickly (2024)

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• Some experts say any loan above student loan or mortgage interest rates is high-interest debt, a range of about 2% to 6%.
• Financial planners often recommend paying off "high-interest debt" before saving or focusing on other financial priorities.
• Look into a balance transfer credit card or consolidation loan for lower interest rates on debt.

When you borrow money from a lender, they charge you interest, usually a percentage of your borrowed money. The amount of interest you pay, meant to offset the risk that you won't pay your debts, is determined by the type of loan you take out and yourcredit score. A higher credit score, which indicates you pay your bills on time, will get you a lower interest rate.

The interest rate of your debt determines how much it will ultimately cost to borrow the money. It can also influence how quickly you pay it off and prioritize other saving and investing goals.

Financial planners often recommend paying off "high-interest debt" before focusing on other financial goals, like saving, but what does that mean exactly? Which debts should be tackled aggressively, and which can be paid off over a longer term?

Understanding high-interest debt

What is high-interest debt?

There isn't a specific threshold where debt is suddenly considered high-interest. Interest rates are constantly changing, and everyone has a different tolerance for debt, making that figure a very personal one that's continuously in flux.

However, Marguerita Cheng, financial planner and founder ofBlue Ocean Global Wealth, says that borrowers can think about high-interest debt in two main ways. "Some folks say that any debt in double digits is expensive debt. Others say anything above student loan or mortgage debt [is high-interest]," Cheng says.

Right now, average mortgage rates tend to hover around 6.45%, and federal student loan interest ratesfor the 2024 to 2025 school year are 6.27%. On the other hand, credit cards and other unsecured loan debt tend to have higher interest rates. The average personal loan interest rate is 21.18%, while the average credit card has a 20.92% interest rate.

"In this context, both a private student loan with a 12% interest rate and a credit card with a 22% interest rate are high-interest debt — and far too high to carry longer than necessary," says Kevin Mahoney, a financial planner and founder of Illumint.

Related: The best low-interest personal loans »

Why high-interest debt is problematic

When talking about high-interest debt with his clients, Mahoney says there's more to the story than the loan's interest rate — it should also be about what your money could be earning if it was invested or saved.

TheS&P 500 is an important stock market index. Investors use it to measure what investing could yield. Mahoney says that historical average stock market returns could be a good guide for high-interest debt.

"We also often have a conversation about how the S&P 500, when adjusted for inflation, has returned just under 7% on an annual basis since 1928," he says.

Mahoney adds, "Using our money requires trade-offs. When a particular source of debt carries an interest rate that significantly exceeds the other ways in which you could use your money, it's a debt and an interest rate that you probably want to pay off as soon as possible."

Common types of high-interest debt

You'll typically see the highest interest rates in a few different types of unsecured debt:

• Credit cards
• Personal loans
• Payday loans

Strategies to manage high-interest debt

There are several options for someone who wants to get out of high-interest debt.

Budgeting and expense tracking

Before you can tackle your high-interest debt, it's important to understand how you got into debt in the first place. Sit down and review your spending and expenses. It might even be helpful to use a budgeting app to understand where your money is going and how you can spend without ending up in debt.

Debt consolidation options

You can also look into debt consolidation products through a balance transfer credit card or a consolidation loan. These products condense all your smaller loans into one large debt, ideally at a lower interest rate. (More on this below.)

Credit counseling services

If nothing else works, you can enlist outside help. You can talk to a credit counselor who may recommend a debt management plan. Under these plans, your counseling agency negotiates loan terms with your creditor, often securing you lower interest rates or lower minimum payments.

Debt snowball vs debt avalanche

The snowball and avalanche methodsare two popular methods for payment allocation when you're staring at a mountain of debt. The snowball method prioritizes paying off your lowest debt, while the avalanche method has you paying off your debt with the highest interest, both of which help you build momentum toward becoming debt-free.

How to lower the interest rates on your debt

There are a few ways to lower the interest rate on your debt.

Negotiate with creditors

Asking your lender for a lower interest rate can be especially effective on credit card debt. It's ultimately up to your lender to decide whether they grant you a lower interest rate, but you stand a better chance if you have a history of on-time payments — which is why it's always better to make the payments you can, rather than no payments at all.

Try a balance transfer credit card

As mentioned above, the best balance transfer credit cards should be able to consolidate smaller debts into a single debt. A balance transfer credit card offers an introductory period during which it charges no interest, meaning you can make faster progress paying your balance. Ideally, you would finish paying off the debt before this introductory period expires — otherwise, a high interest rate will once again take effect.

Use a debt consolidation loan

A debt consolidation loan is a personal loan that combines multiple smaller debts into one at a lower interest rate than the original debt. Note that not every personal loan can be used for this purpose, so be sure you check before applying. The interest rate you get on a debt consolidation loan will depend on your credit score. You can read our guide to the best debt consolidation loans.

Frequently asked questions about high-interest debt