High-Interest Debt: A Plain-Language Glossary of Terms You'll Encounter

APR (Annual Percentage Rate)

The yearly cost of borrowing expressed as a percentage, including the interest rate and most required fees. On credit cards, the APR is divided by 12 to produce a monthly periodic rate applied to your balance. A higher APR means more interest accrues each billing cycle.

Compound Interest

Interest calculated on both the original principal and any previously accumulated interest. On revolving debt like credit cards, unpaid interest is added to your balance, and next month's interest is charged on that larger amount — causing debt to grow faster over time.

Minimum Payment

The smallest dollar amount a lender requires you to pay each billing cycle to keep the account in good standing. Paying only the minimum typically covers most or all of the interest charge, leaving the principal nearly intact and extending repayment by years.

Balance Transfer

Moving an existing debt from one account to another — usually to take advantage of a lower promotional interest rate. Most balance transfers involve a fee (commonly 3–5% of the transferred amount), and the promotional rate typically expires after a set period.

Revolving Credit

A credit arrangement with a set limit that you can borrow against, repay, and borrow again repeatedly. Credit cards are the most common example. Interest accrues on the unpaid balance carried from month to month.

Credit Utilization Ratio

The percentage of your available revolving credit that is currently in use. For example, a $3,000 balance on a $10,000 limit equals 30% utilization. High utilization generally lowers credit scores and can signal financial stress to lenders.

Grace Period

A window — typically 21 to 25 days after a billing cycle closes — during which you can pay your full statement balance without incurring interest charges. Carrying a balance from the previous cycle usually eliminates the grace period.

Penalty APR

A significantly higher interest rate a card issuer can apply after a triggering event such as a missed payment. Penalty APRs can be substantially above the standard rate and may remain in place for an extended period even after payments resume.

Debt Avalanche

A repayment strategy in which you direct extra payments toward the debt with the highest interest rate first while making minimums on others. This approach minimizes total interest paid over time.

Debt Snowball

A repayment strategy in which you pay off your smallest balance first, regardless of interest rate, then roll that freed-up payment toward the next smallest debt. It is designed to build momentum through early wins.

Charge-Off

When a lender writes off an unpaid debt as a loss — typically after 180 days of non-payment — and removes it from their active accounts. A charge-off does not eliminate the debt; the balance may be sold to a collection agency and you remain legally obligated to pay it.

Amortization

The process of paying off a loan through scheduled, fixed payments over a set term. Each payment covers interest first, with the remainder reducing the principal. Early in the schedule, a larger share goes to interest; later payments reduce principal more quickly.