30% of Americans can not answer this important money question – The Motley Fool

Finance can be complicated to understand, but if you want to make sure you live a financially healthy life, it's essential to know if you're making good decisions in the long run. This is especially true when it comes to debt management.

The majority of Americans have at least one credit card. In fact, a Gallup poll found that only 29% of US adults had no credit cards, while 7% of Americans had seven or more. And while credit cards can be healthier and help you reach your financial goals, not understanding all the subtleties could lead to serious damage.

One of the most important features to understand regarding credit cards is the interest rate. Rates of interest rates are notoriously high credit cards (the average being close to 18% per annum), and interest payments can quickly skyrocket. However, nearly one-third (30%) of Americans with credit card debt do not know how much they pay in interest, according to a US News & World Report poll.

Why is this a problem? Because a high interest rate debt can be extremely toxic to your finances and that, if you do not know how much you are paying in interest, you could spend a lot more than you realize.

Why is a high interest rate debt so damaging?

The higher your interest debt, the more your interest payments snowball over time. If you only pay the minimum payments for years, depending on your debt and interest rate, you may not be able to make any progress. On the contrary, your total balance can continue to increase even when you make consistent payments.

Even if you eventually pay the debt, the total of your interest payments could be greater or greater than your initial balance. For example, suppose you have a credit card debt of $ 10,000 with an interest rate of 18%. If you make monthly payments of $ 200, it will take about eight years to fully pay off your debt – and you will end up paying a total interest of almost $ 9,000.

If you are in debt with high interest debt without knowing exactly how much you are paying, you risk spending tens of thousands of dollars over the years in interest payments. In addition, if you continue to accumulate debt while trying to repay the current balance, you will probably end up in a vicious cycle, unable to completely eliminate your debt.

Fortunately, even if you fall asleep in debt, there are ways to overcome this challenge – and the first step is simply to arm yourself with as much knowledge as possible.

Repay the debt one step at a time

Before doing anything, determine what you pay in interest. If you have multiple credit cards with different interest rates, this will help you decide where to focus most of your efforts. Start by repaying the debt at the highest interest rate, even if the balance is not the highest. By deferring debt repayment to the highest rates, your interest payments will continue to increase.

Then, consider taking advantage of a balance transfer card. These types of cards allow you to transfer the balance of your credit card to a new card and enjoy a launch period during which you will pay only a small interest. This gives you the time to quickly reduce your balance without the extremely high interest rate and you can significantly reduce your debt in a relatively short period of time.

Once you have transferred your balance and you have entered the interest-free introductory period, it's time to increase your savings. Do everything in your power to pay your balance before the end of the introductory period (usually between 12 and 21 months), because once this time has elapsed, you will return to paying a rate of interest. high interest.

Once you have paid your credit card with the highest interest rate, then go on the card with the second highest interest rate, and so on until all your credit card debts are over. credit are repaid. In the meantime, do your best not to add extra debt. If you continually add to your balance, it will be difficult to make progress when you reduce your debt.

Debt repayment will not happen overnight. It may take years to pay for it completely, but by strategically defining the debt to be processed first and the way you ensure that your payments have the greatest impact, you can save decades of work and money. thousands of dollars in interest payments.