Tip 1 – Reducing your Interest
This month we are looking at four steps to get out of debt. As I mentioned last week, if debt is not an issue in your life, please consider who you could help by sharing this blog.
Today I’m talking about lowering your overall interest rate. To better explain it, let’s use my friend’s situation as an example. Here is a snapshot of her debt.
- $153 owed on credit card 1 at 19.99%
- $1,500 owed on line of credit 1 at 15.14%
- $1,530 owed to the government at 4.00%
- $8,398 owed on credit card 2 at 19.99%
- $8,400 owed on line of credit 2 at 9.95%
- $9,094 owed on credit card 3 at 19.99%
That’s a total of $29,075 owed at an average interest rate of 16.00%.
If she continues her current payments, she will add $7,150.20 to her debt in one year because of the interest charges. When we talked about her two lines of credit, she mentioned that she could still borrow a total of $5,100 from them. I recommended that she borrow the $5,100 and use it to reduce her credit card debt as they are at higher interest rates
Here is what her debt now looks like:
- $0 owed on credit card 1 at 19.99%
- $5,000 owed on line of credit 1 at 15.14%
- $1,530 owed to the government at 4.00%
- $3,451 owed on credit card 2 at 19.99%
- $10,000 owed on line of credit 2 at 9.95%
- $9,094 owed on credit card 3 at 19.99%
By doing that change, her average interest rate will be reduced to 14.86% and save her over $1,100 of interest charges in the first year.
Getting your debt down to the lowest interest rate is one of the easiest ways to pay off your debt faster. You aren’t adding to your debt at all, and you aren’t impacting your cash flow either. You are simply making sure that more of your payments pay down the debt rather than pay interest.