According to Nerdwallet’s “2020 American Household Credit Card Debt Study,” the average American household has over $7,000 in overdue credit card debt. With the average credit card interest rate around 16.6%, the average family will pay almost $1,155 in credit card interest this year.
In Step 4, we help you navigate through understanding and planning to pay off your debt. The rule of thumb is that consumers should pay off their most expensive debt first because that will minimize overall interest payments. After the highest interest debt is paid off, then work to pay the second highest debt, and so on. This method is commonly referred to as the Avalanche method. It is designed so you pay the lowest amount of interest possible based on your existing debts.
In this step, we examine all your connected accounts to estimate how much “high interest” debt (which we define as debt with an interest rate of over 5%) you are carrying. Your connected accounts tell us the interest rates of that debt as well as the balance.
The purpose of the tool is to help you understand the impact of paying off more of your high-interest debt balance each month. The tool assumes your monthly payments are 1% of your total principal plus interest charges, with a minimum payment of $20. This may differ from how your minimum monthly payments are actually calculated by your lender (for example, your credit card). Our monthly payment formula estimates your debt payoff date by looking at approximately how many months, at your current monthly payment amount, it will take to pay off your outstanding debt. Once our formula knows approximately how many months out you are, it then adds those months to the current date and displays a future estimated debt payoff date. Our formula does not consider additional fees, which range significantly between cards, so our minimum payoff date is only a rough estimate.
From there, we let you experiment with making additional monthly payments towards your high interest debt. For different payment levels, we estimate how much faster your debt will be paid off and how much you will save in interest charges over the life of the debt based on the amount you select for your monthly payment.
After Step 4, you will see the value in paying off your high interest debt sooner.
Move onto Step 5 - Setting Big Goals