The Role Interest Rates Play in Consumer Debt

Higher APRs can prolong repayment

A young dad looks over his year-end credit card statement.

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Interest rates are a big factor when it comes to debt, especially when you’re repaying your debt. Your interest rate makes the difference in several months, and several thousand dollars of debt pay off. The interest rate is a percentage charged on the money you borrow.

Credit Card Interest vs. Installment Loan Interest

On installment loans, banks calculate the interest you'd accrue during the repayment term, then add that total to your loan amount. In these cases, interest is built into your loan payoff. Since loans have a fixed payment amount that includes interest charges, you know upfront just how long it will take to pay back that loan—as long as you make your payments on time.

With credit cards, the issuer charges interest in the form of a finance charge that's added to your balance monthly until you pay off the balance unless you pay the balance in full before the grace period expires. The higher your interest rate, the higher your finance charges will be. When you’re trying to pay off your debt, higher interest rates hurt you because much of your payment goes toward the finance charge.

The chart below visualizes a scenario in which you would have $20,000 in debt, paying $400 monthly. It explores two scenarios, in which the first annual percentage rate (APR) is 10%, and the second APR is 20%.

Interest Rate Example

The finance charge on a $20,000 balance at 10% APR would be $167 for one month. With a payment of $400, about $233 goes toward reducing your balance; the rest applies to the interest.

If that same balance had an APR of 20%, the finance charge would be $333. With the same $400 payment, your balance would only go down by $66. Since your balance is only decreasing a little bit every month, it will take much longer to pay off your debt.

In the first example of $20K at 10% APR, it would take just under five-and-a-half years to pay off your debt if you consistently make $400 monthly payments.

However, at 20% APR, it would take you just over nine years to pay off the balance completely.


Debt-payoff timelines assume your interest rate doesn’t go up, you don’t accrue additional charges or fees, and you continue to make the same monthly payment each month.

How Much Interest Do You Ultimately Pay

In the first example, you’ll pay $5,980 in interest by the time you pay off the balance. In the second example, at a 20% interest rate, you would pay significantly more—$23,360.

The only way to save money on interest is to significantly increase your monthly payment—to $820 per month—or to get your credit card issuer to lower your interest rate.

The bright side of the increased payment is that you could pay off the balance in 32 months, even with the higher interest rate. Even if you’re less than hopeful about getting your interest rate increased, it’s worth a try. And if your credit card issuer turns you down this time, try again in about six months.

Getting a Lower Interest Rate

Convincing your credit card issuers to reduce your interest rate isn’t always easy, especially if you don’t have the credit history to qualify for a lower interest rate elsewhere.

But there’s some good news: If your interest rate increased because you were 60 days late on a credit card payment, the credit card issuer has to lower your rate after six consecutive timely payments.

Debt Relief Could Lower Your Payments and Balances

When you're stuck in a cycle of paying off big balances that have high APRs, significant chunks of your monthly payment go toward your interest instead of your balance. As a result, it can take years to pay off a high-interest credit card.

If your balances are overwhelming you, it may help to hire a debt relief organization. Credit counseling services are one such organization. They have trained staff who can walk you through what you need to do to pay off your credit cards and build good credit scores.

The Bottom Line

Interest plays a significant role in consumer debt. The higher the APR you have on a credit card or loan, the bigger your balance will be and the longer it will take to pay off the debt. The two main ways to pay down the loans faster are to ask for an APR reduction or increase your monthly payment.

If you can't qualify for a lower APR or don't have the money to make a bigger monthly payment, debt relief companies like a credit counseling agency could help you corral your debt and come up with a payoff plan.

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  1. Consumer Financial Protection Bureau. "When Can My Credit Card Company Increase My Interest Rate? What Can I Do to Get the Rate Back Down?"

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