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I Went A Little Bit Overboard With Debt Repayments

Allie Johnson

February 8, 2013

Getting out of debt is great, but can you ever take it too far? I made that mistake just last month by making a repayment that was a little too big.

I’ve been really enthusiastic about debt repayment since last summer, when my husband and I decided to tackle our gargantuan debt head-on. Some of our debt came from having to take out an $8,000 loan to sell our house because the house values in our neighborhood had plummeted so far. We were lucky to be able to sell at all, and we needed to move for my husband’s new job, so we took that hit.

Most of the rest of our debt came from my husband’s undergrad student loan. His interest rate was a whopping 9 percent because he had consolidated at a time when interest rates were very high. He had also put the loan in forbearance, where he didn’t have to make payments but interest continued to rack up, many times when he was younger as well as recently while in grad school. After we got married, we paid almost as much on the loan each month as we did for our mortgage, but our payments didn’t even make a dent in the total. We both hated that debt.

Then, last summer, we decided to do everything we could to become debt free. It was exciting to make that decision, and we’ve been working hard ever since.

Last month, though, I went to make an extra payment on the loan and got anxious to see the balance dip below $50,000. I decided to make a nice, round payment of $2,000, even though that would take the balance in the checking account we use for debt payments to almost zero.

Unfortunately, I’d forgotten to record two other small payments I’d made out of that account, and we got hit with two big overdraft fees totaling $72. Oops.

The lesson I learned? Don’t overdo it on debt repayment. It’s always a good idea to leave a cushion in any account so you don’t overdraw, and I ignored that rule.

The past six months of serious debt repayment have taught me a lot, and this was a good reminder. Here are four other things I’ve learned:

1) Put money in savings first. Personal finance experts generally recommend you fund your emergency account, even if it’s not a full six-plus months’ worth of expenses, before you go full force into debt repayment. This is crucial. I’ve known people who have not done this before making a huge payment on their credit card. Then something unexpected happened, and they ended up having to put a car repair or a new appliance on the credit card, starting the cycle of debt over again.

2) Consider overdraft protection. It’s also a good idea to link your savings account to your checking account for overdraft protection, something I had done for our main checking account but hadn’t done on the debt repayment account. Beware of any fees associated with this, though. My bank charges $12 to transfer your own money, compared with $36 for an overdraft fee.

3) Have a separate debt repayment checking account. This allows you to easily separate your debt repayment money from the funds you need to pay other bills and buy groceries. For me, it helps to mentally divide the two categories and know I won’t dip into the electric bill money to pay extra on the student loan. It doesn’t eliminate all possibility for error, obviously, but it definite helps me get more clarity.

We fund our debt repayment account through both direct deposit and regular manual deposits. We’ve split the direct deposit of my husband’s paycheck, so most of it goes into our regular joint account, but a few hundred dollars from each check automatically goes into our debt repayment account. Because I’m self-employed, I manually deposit most of my checks, splitting them between debt repayment and savings.

4) If you do make a mistake, call your bank. I called customer service to ask about overdraft protection, and the representative offered to credit back one overdraft fee of $36 because we’ve never had an overdraft before.

I think it will be at least another year before we get out of debt, and I’m sure I’ll learn a lot more along the way.