I have credit card and student loan debt. Should I use the domino strategy to pay-off my loans quickly at the lowest cost?
I'm thinking about deferring a student loan for a year(the max allowed) with a balance of $16,000 interest rate of 6.5% and term of 10 years. I want to take the $205 payment a month to pay a CC debt off a year early. The CC is under a debt management program and has a balance of $4,700 interest rate of 9.00% and payment of $190. This will leave me more disposable income in the future to add to the student loan and fund retirement. The downside is I lose any deferral for the remainder of the loan and $1,000 will accrue on the loan. The savings on the credit card interest would only be $200. Need your thoughts.
The "debt avalanche" or "domino strategy" is where you maximize payments on the highest-interest account, and minimum payments on all others. Once you are done making payments on the highest interest account, you maximize payments on the next highest. Then move on down the line until all debt is retired.
You are proposing to follow the avalanche or domino strategy, and it is one I like because it retires debt at the lowest cost in interest. It is also effective because it tends to build a person's credit score. I think your plan is sound.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Did you know?
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Housing debt totaled $12.612 trillion and non-housing debt was $4.891 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Each state has its rate of delinquency and share of debts in collections. For example, in Alaska credit card delinquency rate was 2%, and the median credit card debt was $518.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.
