When you break up with someone, it is often because you need to get their toxicity out of your life. But you can also have a toxic relationship with money, especially debt. And high-interest debt is one form you should try to get rid of as quickly as possible,
Plenty of people carry debts. If you’re one of them, that’s no cause for alarm. If you have a plan and use tools like a loan payoff calculator, there’s no reason you can’t get out from under your financial obligations. Below is what is high-interest debt and the main reasons you should eliminate high-interest debt from your life.
What is High-Interest Debt?
If you speak to different financial experts, they might not all define high-interest debt the same way. Generally, though, you could consider a debt to carry high interest if the rate the lending entity charges you is over 2-6%.
A mortgage rate that’s set at 3% is not high-interest debt. If you have a credit card that will charge you a rate of 20% if you fail to pay off the entire balance at the conclusion of a billing cycle, that’s high-interest debt. If you carry high-interest debts, that will place more of a financial burden on you than low-interest financial obligations would.
Do You Have High-Interest Debt?
We mentioned that some individuals would call a debt high-interest if you’re paying more than 2-6% on it. However, people have different tolerances for debt, so your interpretation of this term might not be quite the same as someone else’s.
Still, there are a couple of different metrics you might use if you’re trying to figure out whether you have any high-interest debt in your life you need to eliminate. First, you might consider debt to be high-interest if it’s higher than the average student loan rate. Currently, federal student loan rates range anywhere from 2.75% to 5.3%.
You can also call a debt high-interest if it’s higher than the average mortgage rate. The typical mortgage rate is 3%. If you have a debt with a rate that’s higher than either of these, that’s an obligation you want to get rid of as soon as possible.
Why Eliminating High-Interest Debt Matters
Most people will have no trouble understanding that they’ll want to eliminate high-interest debt from their lives because it’s hard to keep paying that additional money on top of the balance they’re carrying. It happens most frequently with credit cards, but you might also get into this situation with predatory loans. You might take one of these loans that come with a high-interest rate if you need money, and you feel like you have no other option.
There’s an additional reason why you’ll want to get rid of these debts, though. With high-interest debt, you might cross a threshold where the interest rate you have to pay is more than what you could earn by investing that money.
The S&P 500 has returned a rate of about 7% annually since 1928. If you carry debt with an interest rate that exceeds this number, it shows you’re not using your money wisely. A higher percentage than the S&P return rate essentially proves a debt is high-interest.
Get Rid of High-Interest Debt
Remember, you can consider debt that’s higher than the average federal student loan rate of 2.75-5.3% as high-interest. The same is true if the debt you’re carrying is higher than the average mortgage rate of 3%.
You might also look at it from the standpoint of what your money could bring back if you invested it in the stock market. Your debt is high-interest if it’s higher than the average S&P 500 annual return rate, which is 7%.
If your debt’s interest rate is in the double digits, virtually any financial expert would agree that it’s high enough to significantly impede your financial goals. This is the debt you need to try and pay off as quickly as possible.
End your toxic relationship with money by eliminating high-interest debt. Consider a debt management plan through an accredited nonprofit, like Apprisen. The agency can work with your creditors to lower your interest rates and monthly payment.
Steven Finkelstein, a novelist and freelance writer for Credello.