Interest may seem like just the cherry on top of your debts, but the truth is interest can cause serious financial strife by making it that much harder to get a handle on what you owe.
Take credit card interest: The average rate for a new card offer is higher than 19 percent, while the average interest rate on existing accounts is just north of 14 percent. The rates on some cards are even higher. Anyone carrying a balance from month to month is at risk of accumulating significant interest over time, which draws out the repayment process and means you’ll pay more over the long term.
Reducing the interest on your debts can help you pay off your balance faster and less expensively. Here are four different ways to consider reducing your interest.
Pay More Than the Minimum Balance
Paying the minimum balance is enough to avoid late fees and account delinquency. But getting in the habit of paying the smallest amount you can to avoid the aforementioned consequences will not halt interest from accumulating. Sometimes minimum payments are barely enough to offset interest — which essentially puts you at a standstill in your debt repayment.
The first tip is straightforward: Pay more than the minimum balance. Even if you’re not in a position to pay off most or all of your balance, make an effort to pay more than the minimum each month. You could save yourself hundreds or thousands of dollars over the life of the balance.
Transfer Your Credit Card Balances
Another way to reduce interest, at least temporarily, is to transfer balances from credit cards with high interest to a new card. Balance transfer credit cards typically offer no or low interest for an introductory period, like six months or a year. You can use this window of time to pay down your balance without interest. Just be aware these rates will likely jump back up again once the introductory period ends.
You’ll also pay a fee per balance transfer, usually some amount less than five percent of your total balance.
Take Out a Debt Consolidation Loan
Consumers with credit in decent standing who are looking to simplify their approach to debt repayment may decide to pursue debt consolidation. This method involves taking out a fixed-rate personal loan and using it to pay off your other outstanding balances.
The rationale here is that it’s easier to make a single monthly payment for the life of a loan than it is to keep up with multiple other balances indefinitely. The other potential advantage is a reduction in interest; if you can get a loan with a lower interest rate than your credit cards and
other high-interest secured debt, you have the opportunity to reduce how much you have to pay over time — and streamline the repayment process.
Consider a Debt Management Plan (DMP)
Enrolling in a debt management plan (DMP) through a credit agency is another strategy capable of helping consumers reduce how much they’re paying in interest on debts.
Credit agencies can negotiate with creditors on behalf of DMP enrollees, trying to get creditors to eliminate late fees and reduce interest owed in exchange for setting up a structured repayment plan — usually over the course of three to five years. If you enroll in a DMP, you’ll be expected to make a single timely payment each month for as long as it takes to pay off your debts.
Reducing the interest on your debts using some combination of these strategies could help you more effectively and quickly tackle what you owe.