How to Cut Your High-Interest Debt’s Payoff Time and Interest Paid in Half
September 2020
Before Matriarch, I didn’t have much experience dealing with debt. While it felt like a given at the time, as natural as being fed dinner at 6 p.m. every night and being driven to school every morning, I was wildly fortunate to have two parents who covered the housing, food, and sorority costs my tuition scholarship did not.
Graduating with no student loans and a strong aversion to credit card debt (again, thanks to my parents who reinforced at every swipe that the credit card was to be paid in full every month), I had never worked to pay down debt personally – so when client after client brought debt with varying degrees of intensity, learning quickly was a necessity.
In the last 10 years, the cost of college has risen by more than 25%. The fact that it’s mathematically impossible for a student to put themselves through school by working hourly jobs almost guarantees that students whose parents won’t or can’t foot the bill (understandably so, as the average tuition for a four-year public university is $9,410 for in-state students and a staggering $23,890 for out-of-state students) will end up with some amount of student loan debt.
But this post isn’t an economic criticism of the education bubble (although that’s certainly warranted) – it’s a guide to paying down the debt that the bubble has likely saddled you with. More urgently, it’s a guide to paying down high-interest debt. Fortunately, student loan debt (with the exception of graduate school loans) rarely falls into that category, so the bulk of what we’ll talk through today is probably more relevant for credit card debt.
A quick note on credit card debt
I’m always tempted to make jokes about swipe-happy Sapphire spenders when we start talking about credit card debt, and undoubtedly, that plays a role: a lot of credit card debt is the result of poor planning and impulse control, and there’s no way around that.
However, the student loan debt crisis outlined above doesn’t exist in a vacuum: Sometimes one debt fuels another.
Going to school, taking out loans, and graduating with a low-paying full-time job in a high cost-of-living area is a recipe for disaster. By the time rent and the student loans are paid every month, it leaves very little for actual living. (Another note, for context: According to the Center on Budget and Policy Priorities, the national median household income has risen by 0.5% since 2001. Median rent has risen by 13%.)
This is, of course, not a new issue for young professionals, but it’s certainly exacerbated by the conditions above. And while you’re almost definitely not entirely at fault for a debt situation you find yourself in now, there are strategies to claw your way back. Work smarter, not harder (a lazy intellectual’s dream).
Credit card debt is a slippery slope, and most of the women I work with didn’t voluntarily dive, Dry Bar blowout-first, into the black hole of Neiman’s-induced 17.99% APR (though some did). Most of them overextended themselves little by little, month by month, and looked up one day to find themselves $10,000 in the hole (thanks to that aforementioned 17.99% APR).
The good news is, it’s not always a financial death sentence.
It’s a little like having a broken arm: If you recognize the problem, go to the doctor, undergo the pain of resetting, and agree to wear a cast for a little while, eventually, your arm will function normally again – but if you ignore your broken arm and continue to use it as if nothing’s wrong, you’ll wind up with irreversible damage.
Now that this has taken a sufficiently macabre turn, let’s talk tactics.
The obvious escape chute
I worked with a gal recently who secured an astonishingly high-paying job after working for years in a more average salary band. Her new monthly take-home pay? About $10,000 per month. Wisely, she paid off $15,000 in credit card debt almost immediately – and just like that, overnight, she was debt-free.
This solution is simultaneously easier-said-than-done-obvious and, candidly, a quite tenable option.
Of course, the assumption is if it were possible to go out and get a higher paying job, we’d all do that – as if the winds of upward mobility will shuffle us swiftly forward the moment we outgrow our current situation. But I have to wonder: How many of us are actually actively seeking a higher-paying opportunity and pulling all the levers available to us?
In this particular individual’s case, she had a long-standing relationship with a client in her former role and had established a lot of trust and candor with him. Unsatisfied with her salary, she finally asked him if there were any jobs available at his firm. A position was essentially created for her, and six weeks later, her credit card debt was gone.
While Cinderella stories of this nature can be equally as demoralizing as they are inspiring (“That would never happen to me!”), I encourage you to expand your consideration of what’s possible for you. If you’re underpaid and drowning in debt, rather than finessing ways to stretch your current dollar further, devote some of that energy to acquiring more dollars.
You never know.
It’s worth noting that she isn’t the only client I’ve seen unknowingly employ this approach, though I realize suggesting you simply “go out and get a higher-paying job” is, in itself, unhelpful – but it warrants explicitly suggesting because most of us don’t even think to put much energy into turning over that stone, despite the fact that it’s the Easy Button approach to debt.
The slow and steady strategy
So let’s say six-figure incomes aren’t falling from the sky (although, I repeat, actually look for one).
It’s easiest to illustrate these tactics using an example scenario, so allow me to fabricate an indebted 20-something and you can project yourself onto this imaginary person’s experience.
Showtime!
The situation
Let’s say you’re in the following situation:
$38,000 in student loan debt with a 4.45% interest rate on a 10-year term and a $393 monthly payment (if these numbers feel surprisingly close to your situation, that’s because I used national averages)
$5,700 in credit card debt with an 18% interest rate with a minimum monthly payment of $142.50 (again, averages gleaned from a sloppy Google search)
The basics
Thankfully, the internet abounds with fantastic loan calculators. Here’s the Reality Steve breakdown of what your debt actually looks like:
Your $38,000 student loan (with a 4.45% interest rate, a 10-year term, and a $393 monthly payment) will end up costing $47,149 over the 10 years. Here’s the calculator where you can plug-and-chug your own numbers.
That’s $9,149 in interest and 120 months of your life. Essentially, 19% of your total amount paid was interest – in other words, the privilege of borrowing the money cost you nearly $10,000.
For illustration purposes, let’s say you have an extra $200 sitting around every month (honestly, most of us probably do) and you’re able to pay $593 toward this student loan every month instead of $393.
Now, your loan will end up costing $43,500 over 7 years. That’s $5,500 in interest (a savings of a little less than $4,000) and 84 months of your life. Not bad, right? Right. But it’s not the best use of your extra $200 per month.
Let’s consider a slightly different situation now…
Your $5,700 in credit card debt (with an 18% interest rate and minimum monthly payment of $142.50) will end up costing (are you ready?) $8,770 and take 62 months to pay off, if you only make the minimum monthly payment. Here’s the calculator for determining your own.
That’s $3,070 in interest and 5 years of your life. That’s 35% of the total amount paid! 35% of your total bill to the credit card company wasn’t even money you spent, just the cost of doing business. That’s unacceptable.
Remember your extra $200 per month? Let’s try putting that toward the credit card debt instead, so you’re paying $342.50 toward your credit card every month instead of $142.50.
Now, your credit card debt will end up costing $6,607 over 20 months (fewer than 2 years, compared to more than 5). That’s $907 in interest (compared to $3,070).
What to consider
The interest rate is king. There are competing ideologies about debt payoff strategies, and some of them prioritize psychological satisfaction over basic math. I can understand why; money is deeply psychological. But I say give yourself more credit than that. You know what’s incredibly satisfying? Paying off your debt as efficiently as possible.
Start with the highest interest rate first and shuffle as much of your extra money every month toward that debt as possible.
And while we’re talking about interest rates, it’s worth noting that sometimes you can get interest rates lowered if you call your credit card companies and make a case for yourself. I’ve never actually done this (though I have negotiated annual fees, if you want a sample script for that) so I won’t advise you as though I have, but you can find scripts for negotiating interest rates with a simple Google search.
The momentum of debt repayment
Remember our example above? Let’s say our indebted friend stuck to their $342.50 monthly payment for their credit card for all 20 months and reached the magic $0 balance after a little under two years. With no other debt to speak of, they have options now.
Circling back to the interest rate, let’s think for a second about that 4.5% student loan.
The average annualized rate of return for the S&P 500 (in other words, the amount you can more or less safely assume you’ll make in the market over time) is about 8% from 1957 through 2018.
This is not a guarantee. Some years you’ll be up far more. Some years you’ll be down a lot less. This is merely the (mostly widely accepted) benchmark for long-term expectations.
If you want to be on the conservative side, you can adjust your expectations to 6 or 7%. Then, compare your interest rate on your debt.
A 4.5% interest rate on money owed < 6-7% return on money in the market.
So that extra $200 per month that you’ll get back after you pay off the credit card? Let’s do a quick exercise:
Pretend you shuffled your newly regained $200/mo. toward the student loan. Remember our scenario above?
“For illustration purposes, let’s say you have an extra $200 sitting around every month (honestly, most of us probably do) and you’re able to pay $593 toward this student loan every month instead of $393.
Now, your loan will end up costing $43,500 over 7 years. That’s $5,500 in interest (a savings of a little less than $4,000) and 84 months of your life.”
You had saved $4,000 by putting the extra $200 per month toward your loan for 7 years, paying off the debt 3 years ahead of schedule.
Including rough investment calculations is a slippery slope, so I want to disclaim that this is sheerly back-of-the-envelope math that doesn’t account for freak occurrences (like, you know, global pandemics), so one can never be entirely confident: You’re merely making the best decision you can with the information you have, and letting the math be the guide.
Pleasantries and formalities out of the way, let’s look at what would happen if you invested that $200 per month instead in a low-cost, diversified index fund that averaged a 7% return for those same 7 years.
You invest $200 upfront and $200 every month afterward for 7 years. The rate of return over those 7 years is 7%. (I swear I didn’t intentionally load this example with a bunch of the same number; this is my Fibonacci nightmare.)
Your investment (in this mathematically pure example that exists within the vacuum of an internet calculator) will be worth $21,926.
We aren’t controlling for inflation or taxes, so consider this the high estimate, off which we’d shave a few thousand.
But even if you were to cut this number clean in half, you’d still come out far ahead of the $4,000 you would’ve saved by paying off the student loan faster.
It bears repeating: the interest rate is king
If you were to boil this article down into five words, that would be it.
If your debt’s interest rate is higher than 7(ish)%, you need to focus on your debt. If it’s lower than 6%, you can probably safely assume your money will go further in the market than the interest it’ll save you. If it’s right at about 6 or 7%, it’s a toss-up, and your call.
That said, the very important headline here is this: This only works if you actually invest that extra money, rather than spending it.
This is not permission to only make minimum monthly payments and throw proactivity to the wind. This is a glorified 8th grade algebra problem that helps you determine the best job for your hypothetical extra $200 per month, and artisan bagel shops are not in the running.
The examples become more eye-widening as you throw even more extra at the debt, but for whatever reason, an extra $200 per month feels like a sweet spot. It’s not too much; you could probably recoup it by staying in an extra night or two and choosing a less expensive gym membership – but it’s enough to make a really incredible dent in high-interest debt, as we observed with the 5-year, $3,000 life-sucking credit card situation transformed into a 20-month, $900 inconvenience.
Hang in there
Ultimately, I want to leave you with this: hang in there. If it gets overwhelming, remember: it’s just math. They’re just numbers. You have options. This article didn’t even get into balance transfers, another way to alleviate the squeeze of a high-interest rate, albeit temporarily and with an upfront fee.
More than anything, my hope is that you understand the situation you’re in and what it’ll take to get out: the calculators and logic laced throughout this post will hopefully serve as guideposts for getting your arms around the breadth of your debt, be it big or small. The first step is extracting our heads from the sand.
You’ll get there, and it may take less time, effort, and money than you think.
