Focusing on high-interest debt: pros, cons, and strategies

Paying off multiple debts have you feeling like you're swimming upstream? We’re here to change that and help you understand more about strategies like paying off high-interest debt first. 

The first lesson in changing the direction of the current is something many people don't realise: not all debts are created equal. High-interest debts, like credit card balances, can grow quickly and gradually drain your funds. 

In this article, we’ll explore why focusing on high-interest debts first can be a smart move and how it might save you money, helping you become debt-free faster. Whether you’re handling credit cards, personal loans, or other debts, understanding this approach can make a meaningful difference in your financial journey.

Remember, everyone’s finances are different—what works for others may not work for you. While this strategy helps many with debt, consider how it aligns with your own situation. If you’re unsure, don’t hesitate to reach out to a financial advisor who can offer you a more personalised plan.

Why pay off high-interest debt first?

Understanding high-interest debt and why it’s problematic

High-interest debt includes obligations like credit cards, personal loans, and payday loans. These types of debt tend to carry much higher interest rates than other forms of borrowing, which makes them more costly to manage over time. 

The reason why high-interest debt is such a challenge to many is largely because of the compounding nature of interest. With compounding, interest charges are continually added to the balance, so the debt grows faster than it might seem, even if you're making regular payments.

Imagine you’re dealing with a credit card balance. Every month you don’t pay it off entirely, interest is added not just on the original amount but also on previous interest charges. Similarly, if you have a bank account with fees or overdrafts, those can compound as well. This compounding effect can make debt snowball quickly, which is why high-interest debt can become overwhelming and expensive if not managed carefully.

Benefits of paying off high-interest debt early

1. You could save money on interest payments

One of the biggest advantages of focusing on paying off high-interest debt first is the potential to save money on interest costs. By paying down this debt early, you reduce the amount of time that interest has to build up, which can lead to significant savings. 

Imagine being able to put that saved money toward something meaningful instead, like a vacation or a home improvement project, or just giving your savings a boost.

2. You could free up cash flow

As high-interest debt diminishes, so do your monthly payments. This means you’ll have more flexibility in your budget to direct funds toward other goals, like building an emergency fund, investing, or saving for a major purchase. 

Freeing up cash flow provides you with more control and can help bring your financial goals closer.

3. You could reduce stress and improve your financial well-being

High-interest debt can add a lot of stress, weighing on you each month as the balance seems to accumulate exponentially. By paying it down, you’re not just improving your finances, you’re also giving yourself a much-deserved peace of mind. 

Being proactive about reducing debt can also positively impact your overall well-being, making it easier to focus on the future instead of worrying about the present.

Exploring debt repayment strategies

Now, let's explore two popular methods for tackling multiple debts. While each has its own approach, understanding both can help you make informed decisions about which might align with your specific situation and preferences.

The debt avalanche method

This strategy involves focusing extra payments on the debt with the highest interest rate while maintaining minimum payments on other debts. Once the highest-interest debt is cleared, the focus shifts to the next highest, and so on.

The maths behind this method tends to result in less money paid in interest over time. However, if the highest-interest debts also have large balances, it might take longer to see visible progress, which some find challenging for maintaining momentum.

The debt snowball method

This approach focuses on paying off the smallest debt balance first, regardless of interest rates, while maintaining minimum payments on other debts. As each small debt is cleared, the freed-up money goes toward the next smallest balance.

Many people find this method motivating because it can provide quick wins. Seeing debts disappear entirely, even if they're small, creates a sense of progress that can help maintain enthusiasm for debt repayment. 

While this doesn’t focus on paying off high-interest debt, many people are drawn to (and motivated by) the psychological boost it provides.

Comparing different approaches

Consider this example:

Someone has three debts:

Credit card: £5,000 at 20% interest

Personal loan: £2,000 at 12% interest

Store card: £800 at 15% interest

The avalanche method would target the credit card first (highest interest), while the snowball method would start with the store card (smallest balance).

The avalanche method might save more money in interest payments, but the snowball method could provide faster visible results by eliminating the smaller debts more quickly.

Some find that combining elements of both methods works best for their situation - perhaps focusing on a small, high-interest debt first to experience both the mathematical and psychological benefits.

Remember, choosing a debt repayment strategy is a personal decision that depends on various factors, including financial circumstances and personal motivation style. It’s not a one-size-fits-all type of situation. 

Important factors when considering debt repayment

Remember how we said in the beginning “not all debts are created equal”? Well here’s what we mean: when mapping out your debt repayment plan, there are several key factors that can influence how you choose to prioritise what. Let's explore these elements to better understand how they might affect different financial situations.

Understanding different types of debt 

Debts generally fall into two categories: secured and unsecured: 

• Secured debts, like mortgages and car loans, are tied to specific assets and typically carry lower interest rates. 
• Unsecured debts, such as credit cards and personal loans, usually have higher interest rates because they're not backed by assets.

While a mortgage might have a 5% interest rate compared to a credit card's 20%, this doesn't automatically make it the priority. The secured nature of mortgages and car loans means different considerations come into play, like protecting essential assets that provide housing and transportation.

Looking at personal financial circumstances 

Several factors can influence debt repayment priorities:

• Monthly income stability
• Essential living expenses
• Emergency savings availability
• Other financial obligations

For instance, someone with variable income might prioritise differently than someone with a steady paycheck. Available cash flow after essential expenses also plays a significant role in determining realistic repayment amounts.

Credit score considerations 

Paying off debt can impact your credit score in a few ways: how much credit you use (credit utilisation) and how you manage accounts after repayment. Keeping up with payments, using credit wisely, and making smart account decisions are key to navigating this territory. Since everyone's situation is different, it’s a good idea to get advice from a professional for your best approach.

Making informed choices about debt repayment

High-interest debt can feel like an uphill challenge, but understanding how interest compounds and affects different types of debt can help make repayment feel more manageable. 

Additionally, recognising the weight of high-interest debt gives you a clearer sense of why certain debts may deserve more focus, allowing you to choose a strategy that aligns with both your financial situation and personal approach, whether that means a steady, structured method or motivating quick wins.

Remember, what matters most is taking those first steps and staying consistent with a plan. Everyone’s debt journey is unique, so the key is finding a sustainable plan that helps you move toward greater financial flexibility and peace of mind.

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