Perspectives : DC Retirement | February 16, 2023

Tools to help your participants shrink high-interest debt

Read time: 10 minutes

The second in a series about financial wellness.
Volatile markets, inflation, and rising interest rates are enough to make even the most stoic investor feel a little stressed when it comes to protecting their money.

Vanguard’s Guide to Financial Wellness, which introduces our financial wellness framework, can help your participants tune out the noise and turn their money from a source of stress to a source of some peace of mind.

Because money is very emotional; it elicits strong reactions. And as the guide explains, one way to find some peace of mind and bridge the gap between money and emotion is for retirement plan participants to take control of their finances, and that includes eliminating their high-interest debt.

Lingering, high-interest debt can be dangerous to a participant’s wealth. Because with interest rates on the rise, that debt may take longer, and cost more, to pay off.

There’s debt, and then there’s high-interest debt

Of course, all debt carries interest. That’s how lenders stay in business and allow individuals to continue borrowing money. And some of the rates that lenders apply to a loan can be considered low (however, the interest on a 30-year mortgage—usually thought of as “good” debt—climbed from 2.7% to 6.09% since 2020, according to Freddie Mac as of February 2, 2023). But personal, high-interest debt is a different breed.

Generally, high-interest debt carries an interest rate that’s not likely to be matched by the returns on one’s investments. And with the average interest rate on credit cards, for example, hovering at 23.39% (LendingTree, 2022), the average investor’s return on their investments can’t keep pace.

This chart shows how credit card interest rates could be much higher than the Vanguard Capital Markets Model® (VCMM) projects for the next ten years.

Paying down credit card debt

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of June 30, 2022. Results from the model may vary with each use and over time. For more information on VCMM, see below.

Notes: The figure compares median 10-year VCMM projected annualized investment return distributions with common consumer debt interest rates (annual percentage yield, or APY). Credit card debt at an 18% interest rate is a hypothetical example and is not meant to reflect a true cost of lending.

Source: Vanguard.

The effects of high-interest debt on a participant’s financial wellness is a little like Newton’s law of actions having equal and opposite reactions. That is, if compound interest is considered one of the most powerful forces working for the greater good in finance, high-interest debt is the equally powerful force working against it. Picture Sisyphus pushing his stone to the top of a hill, only for it to roll back down, again and again.

Attack debt from two sides

Two common strategies for shedding high-interest debt (or any debt, really) are called “avalanche” and “snowball.”

With the avalanche strategy, a participant works on getting rid of the high-interest debt first. They make the minimum payment on all their debt (which is also important) except for the highest-interest one.

For that debt, they pay more than the minimum, whatever they can afford, until it’s paid off. Then they get to work on the account with the next highest interest—following the same approach of paying more than the minimum—using the money they save from the debt they just paid off. When that one is paid,  they move on to the next highest. And so on. All while continuing to pay the minimum on all their other debts.

The snowball strategy is similar except a participant concentrates on paying the debt with the lowest balance first. This strategy can provide a quick sense of accomplishment and build momentum to keep moving through their other debt. But in this strategy, participants are still spending more by continuing to make payments on the remaining higher-interest debts.

How we’ll help

Our Debt Paydown Strategy tool can help your participants maintain control of their money while escaping from the clutches of high-interest debt. Pretty easily, too. It works like this:

Within My Financial Wellness, your participants tell us all about their debts—what they owe, the interest rates, and minimum payments. The more they tell us, the better we can personalize the tool for them.

Then, we calculate their total debt and the interest they’ll have to pay and present either the avalanche or snowball strategy to help pay it all off. The two strategies will reflect interest saved and debt-free dates associated with each to motivate participants to act on the payment strategy they feel comfortable with.And to top it all off, we’ll give them an estimated payoff date—hopefully with a little less stress.

See the tool in action in this video.

Video Length: 1:12

How can participants find the money to pay down debt?

Budgeting is the key. Research shows that 60% of American households live paycheck to paycheck (PYMNTS and LendingClub, 2022), which makes it difficult to save for anything beyond the next paycheck—limiting their chances for paying down high-interest debt or saving for other financial goals, like retirement.

But a thoughtful budget can help participants control their spending and free up some money to put toward getting rid of debt and saving for retirement.

Stay on the path to financial wellness

Paying down debt and budgeting are just two of the financial wellness tools at our disposal to help your participants. We combine investments, advice, and financial wellness to get your participants well on their way to achieving a sense of financial well-being.

Don't miss the first part of our financial wellness series, The Path to Financial Wellness Starts HereFor more about our financial wellness framework and getting finances under control, read and download Vanguard’s Guide to Financial Wellness.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
  • The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
  • The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
  • Advice is provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor. Eligibility restrictions may apply.