The Dangers of High-Interest Debt
Why credit card debt can be so destructive and how to fight back.
How Compound Interest Works Against You
When you carry a balance on a high-interest credit card, you're not just paying interest on the money you borrowed. You're paying interest on the interest. This is compound interest in reverse, and it can cause your debt to spiral, making it feel impossible to pay off.
The Minimum Payment Trap
Making only the minimum payment is what credit card companies want you to do. A small minimum payment on a large balance means the vast majority of your payment goes toward interest, with very little reducing the principal. It can lead to you being in debt for decades and paying back many times what you originally borrowed.
The Opportunity Cost
Every dollar you pay in interest is a dollar you can't use to build wealth. A 20% interest rate on a credit card is essentially a -20% return on your money. By eliminating this debt, you free up your most powerful wealth-building tool: your income.
Strategy 1: The Debt Avalanche
As discussed in our strategies article, the Avalanche method is mathematically the best way to tackle high-interest debt. By focusing all your extra cash on the debt with the highest APR, you minimize the total interest you'll pay, saving you the most money in the long run.
Strategy 2: Balance Transfer Cards
If you have good credit, you may qualify for a balance transfer credit card. These cards offer a 0% introductory APR for a period (e.g., 12-21 months). This allows you to transfer your high-interest balance and make payments that go entirely toward the principal, stopping the interest from bleeding you dry. Be mindful of transfer fees and have a plan to pay it off before the intro period ends.
The Bottom Line
Treat high-interest debt like a financial emergency. It's a fire that is actively burning your money. Make a plan using a tool like The Paycheck Project, commit to it, and throw every available resource at it until it's gone. Your future self will thank you.