Feeling weighed down by credit card bills or other high-interest debts? You’re not alone. Many people find themselves in this situation, and it can feel overwhelming. But here’s the good news: you can take control. Paying off high-interest debt is the crucial first step towards building a solid financial foundation, as the interest you’re paying is likely eating away at your available income to save and invest. Let’s break down why this matters, and some strategies to pay down debt.

 

What is high-interest debt?

High-interest debts are debts which have an interest rate above the average rate on the market. High-interest debt can include all types of financial products, but the highest interest products are usually credit cards, personal loans or payday loans.

 

Why high-interest debt holds you back

Imagine trying to fill up a bucket with a hole in the bottom. That’s what trying to save and invest while carrying high-interest debt is like. The interest you’re paying essentially drains your financial resources, making it harder to reach your goals.

Compound interest can make it harder to catch up – this is where you’re paying interest on top of your interest, making your debt grow. Plus, every pound you spend on this interest is a potential pound lost towards your savings and investments.

As well as your financial health, high-interest debt can also negatively impact your mental health. It can cause significant stress and anxiety, affecting your wellbeing and preventing you from moving forward in life. So, let’s tackle it together.

 

Practical ways to pay off high-interest debt

When it comes to paying off high-interest debt, having a plan and sticking to it is crucial. Let’s look at the different strategies to pay down or pay off your debts.

  • List and prioritise your debts: Knowing where you stand is the first step. Start by creating a list of all your debts, including the interest rates and balances you owe. Include payment dates, so you don’t miss these and incur further charges.
  • Create a budget: Try to prevent yourself from going further into debt by tracking your income and expenses. This helps to identify potential areas of overspending or opportunities to cut back.
  • The Snowball Method: One option is paying off the smallest debt first, regardless of the interest rate. This strategy helps build momentum by seeing quick wins.
  • The Avalanche Method: This strategy involves focusing on the debt with the highest interest rate first, minimising the overall interest.
  • Consider a balance transfer or debt consolidation: If you have multiple high-interest debts, options can include balance transfer credit cards or debt consolidation loans. Make sure to always read the fine print and understand the fees associated with these products first.
  • Increase your income: Are there any creative ways you could boost your income? Consider side hustles, freelance work, or asking for that pay rise.
  • Stay in touch with creditors: Help is always out there. Don’t be afraid to contact your creditors proactively and ask if they’d be willing to lower your interest rate or create a payment plan.

If you need support from someone impartial, the debt charity StepChange is an excellent resource for free advice, and can give you a tailored plan to help you get back on track.

Paying down debt is your first financial win

Before diving into saving or investing, make paying off high-interest debt a priority. This can help you to:

  • Free up cash flow: Once the debt is gone, you’ll have more money available to build wealth and start working towards your long-term goals.
  • Improve your credit score: Consistently paying down debt positively impacts your credit score, making it easier to secure loans and competitive interest rates in the future.
  • Boost your financial confidence: Overcoming debt is a major achievement that will give you a sense of control over your finances!

Once you’ve conquered your high-interest debt, you’ll be well-positioned to start building your savings and investment portfolio. This is where your financial journey truly takes off. Let’s move onto Step 2 – Building an emergency fund.