Paying off your credit card debt can be difficult if your credit card has a high Annual Percentage Rate (APR). If you are making only minimum payments, your credit card balance might not budge since your payments are consistently going toward interest charges. If you want to make progress on paying off the balance on a credit card with a high interest rate, you may want to look into strategies that help you bring down both your interest rate and balance.
Interest rate is charged every month on outstanding credit card balances. The interest is calculated daily on outstanding balances, and then added to the next day's balance, and so on. As interest is compounded daily your balance continues to increase.
That's why it can be difficult to pay off high interest rate credit cards, if you only meet the minimum payment each month. Reducing your balance by paying off more than the minimum payment each month is a simple solution, but sometimes you might need to resort to more focused debt management strategies to make a big dent in balances on cards with high interest rates.
Here are some tried and tested options for you to consider. But first, it helps to get a good grip on how debt can grow on credit cards with high interest, especially if you only meet the minimum payment each month:
Let's say you have a $2,000 balance on your credit card, which carries an APR of 21% and a minimum payment of $56 for the first month. If you were to pay only the minimum each month (minimum payment changes each month as balance varies), it'll take you about 108 months, or 9 years to pay off your debt, assuming you haven't added more to this $2,000 balance. You'll also pay about $2,180 in compounded interest costs over that period of time.
How can I pay off a credit card with high interest rate?
Paying off more than the minimum payment will obviously shorten the time to pay it off in full, as well as lessen the amount of interest you pay. But often it can take a substantial increase in a consistent monthly payment to get to a zero balance on a high interest rate card.
For instance, if you were to increase your payments to a fixed $100 per month (more than minimum payment) on that card with the 21% APR and a $2,000 balance, you'll still pay about $486 in interest charges but it'll take only about two years to get the balance down to zero.
How can I pay off my credit card with high interest?
If you want to reduce the balance faster, but can't afford to substantially increase your monthly payments, try the following:
- Negotiate a lower interest rate. If you noticed that your interest rate has increased (which will make it harder for you to pay off over time), you may be able to contact your credit card company to negotiate a rate that works for you. If you have a variable interest rate, it may have increased due to state laws and this may be more difficult to negotiate. However, if you have a fixed rate, your interest could still increase due to late or missed payments, a high balance or drops to your credit score. If you are a long-time cardholder with a positive payment history, you may be able to explain your financial situation to your creditor and possibly lower your rate.
- Request a balance transfer. When you transfer your credit card balance to a low-interest credit card, you'll benefit from low or zero interest charges for a period of time, usually between 18-21 months. The low-interest promotional period may also motivate you to pay off your entire balance before you are charged interest again. Keep in mind that balance transfers typically charge a fee, which can amount to 3-5% of the amount you are looking to transfer.
- Make consistent, on-time payments. If you do qualify for a 0% or lower promotional rate, work out how much you need to pay on the card each month to bring the balance down to zero before the period ends. Then put that monthly amount on auto-pay which will prevent you from missing your payment date.
Even if you don't qualify for a lower interest rate or promotional credit card offer, call your lender and work out what amount you can afford to pay on the high interest rate card over time, and put that amount on auto-pay. Then cut up your card (or ask your credit card company or bank to lock your account) so that you're not tempted to add any purchases to the balance.
Why is my interest rate so high?
Your credit card interest rate is based on your credit score, inflation, your current balance, and more. If you adopt one of the strategies above to pay off your cards' balances, you may see your credit score improve and your future rates for credit applications come down.