How To Pay Less Interest on Credit Card Debt, Loans and Mortgages

Get Out of Debt Faster by Paying Less Interest on Everything

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The cost of debt is interest - how much money you owe for the privilege of borrowing money. Interest rates can vary from 0.99% promotional offers to 30% high-risk credit lines, but the end result is the same: You pay more than the original cost of the item. This has a snowball effect of increasing the total amount of money you owe, which results in higher interest payments, causing the amount of debt to increase. You can apply these tips to immediately reduce the amount of interest you pay each month, helping you get out of debt faster.

Step 1

Pay Bills Early
Pay your bills as soon as you can instead of waiting for the due date to reduce the total amount of interest you will pay. Typically, interest accrues based on your average daily balance, so you're better off reducing the balance as soon as possible.

If you owed $5,000 dollars on a credit card at 20% interest rate, your minimum payment would be about $200 each month. If you pay your payment as soon as you receive the bill in the mail (instead of waiting for the due date and risking late fees) you will reduce your balance immediately and avoid paying about 25 days of interest on that $200. That's about $35 less you will pay in interest each year.

Step 2

Pay Bills More Often

If possible, pay a portion of the bill each time you receive a paycheck instead of only once a month. Before starting this practice, check with your creditor to make sure that the additional payments will reduce your principal and are applied toward your next payment due. Not only will this make large monthly bills seem more manageable, but it will also help you pay off your debt faster by reducing the outstanding principal.

Let's say you have a $150,000 mortgage at 7% interest and your mortgage payment is $1,000 each month. If you change the payment schedule to $500 every two weeks, you will pay an additional $1,000 each year - save you over $50,000 in interest and paying off your loan in 24 years instead of 30 years.

Step 3

Pay Most Expensive Debts First
If you have multiple forms of debt - a wallet full of credit cards, or several personal and car loans - this is the single most effective way to reduce the total amount of interest you will pay. Make a list of all your debts and the interest rate on each, and then focus on paying off the one with the highest interest rate. Make only the minimum payment on all the others, but pay as much as you can to that one - your most expensive debt. Once you've paid off that debt, apply the same strategy to the next-highest interest rate on your list. To see exactly how much money you will save using this practice, do an online search credit card payoff or debt reduction financial calculators.

Step 4

Don't Pay Interest to Earn Interest
If you have a steady income and an ample large emergency fund, consider taking money out of savings to pay off your debt. When the goal is reducing interest costs, it makes sense to eliminate debts that have interest rates of 10% or more instead of keeping money in a savings account or money market fund earning less than 2%. Possible exceptions to this are loans with tax-deductible interest such as student loans or mortgages.


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