How To Calculate Your Average Interest Rate for Credit Cards vs Debt Consolidation Loan (and why it’s important)
I’m going to walk you through how to figure out what your average interest rate is across several different debts or credit cards. But first, I want to explain why it could be important for you to know that. When you are working on paying off debt, it is important for you to understand what the money is really costing you. If you know what your overall average interest rate is, you can better evaluate whether a balance transfer credit card or debt consolidation loan could help you accelerate your effort to get out of debt. If those offers aren’t significantly dropping your average interest rate, it might not be worth doing. You might be better off just paying off your debt in place.
When you are calculating your average interest rate, you are weighting the loans that are bigger, because more of your debt is being influenced by that credit card’s interest rate. For that reason, I find it intuitive to begin by determining what percentage each loan is of your total debt. You do that by dividing each credit card balance by your total debt. Next, multiply that percentage by the credit card’s interest rate. That number by itself doesn’t mean anything. But when you sum up all of those numbers, you end up with your overall average interest rate.
In this example, you can see that you have three credit cards that all have similar interest rate.
Then you have an installment loan with a much higher interest rate. In this case, your overall interest rate is 36%. If you were offered a debt consolidation loan with an APR of 28%, you might think it was a good idea. After all, you would drop your weighted APR from 36% to 28%. But you can see that the debt consolidation loan’s interest rate is actually higher than any of your other credit cards. You would be better off if you replaced the installment loan and not consolidate your credit card debt. If you replaced your installment loan and left the credit cards as is, you can see that you would end up with a weighted average interest rate of 23%. That’s 5 percentage points better than consolidating everything.
If you are interesting in seeing what kind of a debt consolidation loan you could qualify for, go to our marketplace page at The Yukon Project. You can select debt consolidation and then apply to any one of our featured lenders. Behind the scenes, we will check your rate with up to 40 other lenders. Our partners use a soft credit check, so applying won’t hurt your credit score. We’ll show you all of the offers. If you don’t see one that will be significantly better than your current average interest rate, you have no obligation to take the loan.
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