I have asked several members of the No Credit Needed Network to write guest posts - and share their stories.
The following is a guest post from NCN Network Member - Paid Twice.
Interest Order vs. Balance Order and the Root of Motivation
When I started seriously looking at getting out of debt, I didn’t really know much about how other people had done it. I hadn’t read any personal finance books (I was still under the mistaken impression that personal finance books were for people who already had a good idea of how to manage money) and I hadn’t really read anything online. I decided to focus on my credit card debt first for two reasons. First, it was credit card debt. It seemed worse to me than any other debt I might have. And second, it had a high interest rate. It did indeed have the highest interest rate of all my debts, but since at that point I didn’t even know the interest rates on our student loans, I can’t say I decided solely based on that.
As I slowly progressed and developed a plan, I started reading online resources such as message boards and blogs, and I learned about the interest order vs balance order debate. Basically, in paying off debts lowest balance to highest, you receive psychological boosts when you pay off each debt, and it helps keep up motivation. Paying off debts in interest rate order (highest to lowest) it may be a long time until you pay off your first debt, and that may not be motivation enough to keep going.
Truth be told, whichever method you choose, the key is to pay off your debt. Although following the balance order approach may cost you more in interest, it certainly costs a lot less than staying in debt indefinitely.
I gathered up my four debts, listed them in order of highest interest to lowest with balance attached, and I stayed the course I was on - paying off my credit card debt first. For me this made the most sense for two reasons - one, all my debts had rather high balances (over $5000 each when I started) so none of them would be a “quick fix”. I didn’t have any small debts of a few hundred dollars I could get a psychological boost from. Second, the credit card debt is truly what bothered me the most . I was the most motivated to watch the credit card balance shrink day by day and week by week, and so focusing on this debt really did provide me the most psychological satisfaction.
For me, how I kept motivated facing a large balance is I set mini-goals for myself. Instead of thinking about eliminating the credit card debt, I would look towards crossing the next $1000 barrier. When my balance was $6500 I would think about how to get to under $6000 and set my goal for that. When I was at $5800 I set my sights on being under $5000. This has really worked for me and kept me motivated even in the face of several potential setbacks.
My credit card debt is now almost gone, and it is time for me to reevaluate my plan. My spouse’s student loan is next on the chopping block, and I am actually looking forward to figuring out how we’ll attack that and harnessing the power of our ever-increasing debt snowball.
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I want to thank Paid Twice for the guest post. You rock!
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December 20th, 2007 at 7:28 pm
[…] order I assigned them originally was random anyway. Today at the No Credit Needed Network site, my personal choice #4, Interest Order vs Balance Order and the Root of Motivation, is a guest post! NCN asked me to write a post about some aspect of my story to be featured on the […]
December 30th, 2007 at 11:40 am
[…] Paid Twice at the No Credit Needed Network: Interest Order Vs. Balance Order […]