High-interest debt has a bad reputation — and rightfully so. Debt that charges high rates is the most expensive for borrowers to carry. And the longer you leave it unpaid, the quicker the costs grow, especially if it compounds daily.
But when you're juggling various kinds of credit (and thus debt) with varying interest rates, how do you know what's considered "higher" than others? While everyone might have a different definition of what makes an interest rate unreasonable, there's a personal finance rule of thumb that can help you prioritize which type of debt to target first. Below, we help you identify high-interest debt and give you tips on how to get rid of it.
What's considered high-interest debt?
High-interest debt can be identified as debt that charges a rate above the average federal student loan or mortgage rate, according to credit bureau Equifax. Mortgages and federal student loans are generally considered "good" debt because they're seen as investments that can ultimately increase your wealth (via equity in your house or from the increased income you get from having a college degree).
Additionally, mortgages and federal student loans usually charge some of the lowest interest rates when compared to other types of debt. On the other hand, credit cards, private student loans and payday loans carry some of the highest interest rates of all debt types.
With the average 30-year fixed mortgage rate currently at 7.18% (and the average undergraduate federal student loan rate at a much lower 4.99%), that means you could consider any debt with an interest rate higher than 7.18% as high. However, mortgage rates fluctuate constantly, so you may want to reserve the "high" label for debt charger interest at 8% or greater (which is what Equifax does).
If you have high-interest debt
Below are some strategies to help you pay off your high-interest debt.
Balance transfer credit cards
Balance transfer credit cards are an effective way to get rid of your credit card debt because they allow you to transfer your unpaid balance to a new credit card with payments interest-free. Balance transfer cardholders can get an introductory period of up to 21 months to pay off their debt without accruing any additional interest. With interest put on hold, you can actually make a dent in your debt. Just make sure you have a plan for how to pay off your entire balance before the introductory period is over since you'll then be charged the card's APR.
The Wells Fargo Reflect® Card comes with a 0% APR introductory period of 21 months for new purchases and qualifying balance transfers (after which you'll be charged a variable APR of 18.24%, 24.74%, or 29.99%; balance transfer fee of 3% for 120 days from account opening, then up to 5%, min: $5).Another option is the Citi® Diamond Preferred® Card, which has a 0% APR introductory period of 21 months on qualifying balance transfers (after which you'll pay a variable APR of 18.24% - 28.99%; balance transfers need to be completed within 4 months of account opening).
Wells Fargo Reflect® Card
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.
Regular APR
18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees. Terms apply.
Citi® Diamond Preferred® Card
Learn More
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% for 21 months on balance transfers; 0% for 12 months on purchases
Regular APR
18.24% - 28.99% variable
Balance transfer fee
5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees.Terms apply.
Refinancing
Refinancing is another way to lower your interest rate, especially if your credit has improved since you last took out a loan.
For example, some private student loans already charge pretty high interest rates but you could try to refinance with top lenders like SoFi®, Earnest and Education Loan Finance (ELFI) to score a lower rate and a new repayment term. By setting a new repayment term, you can decide how quickly you want to pay off your loans. A shorter timeframe would mean making more aggressive monthly payments and a longer timeframe would mean lower payments.
Just note that this advice applies to any private student loans you have. If you have federal student loans, you should think very carefully about refinancing them with a private lender, as you'll lose access to helpful protections such as income-driven repayment plans.
SoFi
Eligible borrowers
Undergraduate and graduate students, parents, health professionals
Loan amounts
$5,000 minimum (or up to state); maximum up to cost of attendance
Loan terms
Range from 5 to 15 years; up to 20 years for refinancing loans
Loan types
Variable and fixed
Co-signer required?
No
Offer student loan refinancing?
Yes - click here for details
Terms apply.
Earnest
Eligible borrowers
Undergraduate and graduate students, parents, half-time students, international and DACA students
Loan amounts
$1,000 minimum (or up to state); maximum up to cost of attendance
Loan terms
Range from 5 to 15 years
Loan types
Variable and fixed
Borrower protections
9-month grace period
Co-signer required?
No
Offer student loan refinancing?
Yes - click here for details
Terms apply.
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.19% APR to 9.74% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.99% APR to 9.74% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 9.99% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.
Bottom line
High-interest debt is generally anything higher than the current average federal student loan or mortgage rate (whichever is greater). Some common products that cause high-interest debt include credit cards and personal loans. Prioritize paying off this debt since it costs you the most.
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AtCNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debtproducts.While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. Seeour methodologyfor more information on how we choose the best credit cards and student loan lenders.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
