Paying down debt

Do you have debt? What kind of debt do you have? Is it student loan, credit card debt, car loan, mortgage, medical debt etc.

When I start my debt repayment journey, I had student loan and credit card debt. My credit card was not a lot, but it was debt I had accumulated over a year when my card had the 0% introductory interest rate. The 0% introductory period was coming to an end, and I needed to pay it all quickly to avoid paying the 22% interest rate. I also had student loan with various interest rates. I had the Perkins loan with 5%, the federal subsidized and unsubsidized loan ranging from 3.4% to 6.8%, and a private loan from 9.5%-10.5%.

There are two types of debt repayment plan, the debt snowball and the avalanche method.

The debt snowball made popular by Dave Ramsey involve making minimum payment on your debt, and putting extra money towards paying down your lowest debt. The strategy gives you momentum and motivation quickly so that after you finish paying down that debt, you put the monthly payment towards the next lowest debt and so on.

The avalanche method entails paying down the debt with the highest interest rate first so as to save money in the long run.

In my case, I have both strategy, and am currently using the avalanche method. I paid off the credit card debt first to avoid the high interest rate coming up on the card. Then I paid off the Perkins loan next, it was a small amount of $1000. I figured that if I can get rid of that quickly and I did. It helped tremendously because it was one less account to sign into. After this, I focused on the private loan. I hated this loans because of the 10% interest rate attached to them. I shed a little tear every time I made a payment on this loan. I signed up for auto repayment to help reduce interest rate, but it only worked for few months. I think the fact that the variable high interest rate of 10% motivated me to pay it off quickly. Also it had a cosigner, and I disliked the idea of the loan company going  after the cosigner incase anything happened to me. I was so relieved when I paid it off, and have transferred the motivation to paying off  the federal loans.

While Dave Ramsey recommend the debt snowball, I think it is possible to combine both methods. In my case, I started with the debt snowball, and once I had a little motivation I switched to the avalanche method because I didn’t like seeing the growth on the  10% interest rate loan. I would suggest this method for other people paying off loans. I believe that you need the debt snowball motivation early on, but once you are motivated enough, it makes mathematical sense to switch to the avalanche method.

Are you currently paying down debt? What method are you using and why?

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