Student Credit Card Debt

Student credit card debt is a huge problem. Actually, a broader and much more accurate statement is that student debt is a huge problem. When you add student loans to the credit cards, many grads start out in the “real world” with tens of thousands of dollars in debt. According to www.creditcards.com, 84% of all college students have at least one credit card. As of 2009, the average credit card debt for graduating seniors was $4200. According to www.FinAid.org, 86.3% of college students borrowed to pay for their education and the average student loan debt was $24,651. When you add it up, the average amount of debt students have upon graduation is about $28,851!

The Federal CARD Act prohibits credit card companies from distributing applications on campuses. The law also makes it a little more difficult for people under 21 to obtain a credit card but not a lot. They have to get mom or dad to agree to co-sign on the credit card application. This is essentially no barrier at all. According www.duck9.com’s student research on credit literacy, “Percentage of students with a credit card from their parents 70%.” If that many parents put their college students on their own credit card accounts, it’s pretty safe to assume that a similar number are likely to co-sign their under 21 college students’ credit card applications. Of course nothing in the law addresses the millions of students around the country who already have credit card debt.

If these graduating college students never charged another penny on their credit cards and made the minimum monthly payments on those debts and their student loans until they were paid off, they will pay about $27,000 in total interest and will be paying those debts for about 14 years. This means that money won’t be used for savings, purchasing power or anything else. Graduating seniors need to make it a priority to get out of debt as fast as possible. They need to work out a budget that they stick to and pay off their debt early. The faster it’s paid the less interest they accrue and the better off they’ll be financially. That’s the only rational approach to existing student debt.

For future college students, parents should not co-sign credit card applications for their college age children. This way student credit card debt for future graduates can be curtailed to some degree.

Solution or Trap?

When you surf personal finance sites or search Google for terms related to personal finance you inevitably encounter ads promoting “Very Bad Credit Personal Loans”, “Guaranteed Approval Loans! Bad Credit OK!”

Well, these guys must be making some money otherwise they wouldn’t keep paying for ads. After seeing a TV ad promoting one of these companies last night, I remembered a time several years ago when I “had to” get such a loan. I was in a financial jam and just “needed” so much money and it would all come out okay. Guess what? It wasn’t. Not in the long run anyway. Sure I got the money I thought I needed. That did solve the immediate problem. It did nothing to address the real issue. The real issue was that I was spending more than I was making. The “very bad credit personal loan” company (I’m not going to give their name) didn’t care. They wanted to make the money off my loan. They did too. A lot of it.

You can’t borrow your way out of financial problems. If you have financial problems, you need to find ways to get your expenses below your income. You can increase your income or decrease your expenses or both. Whichever approach you take you need to get to the point of having your income above your expenses. Until then you will have financial problems – maxed out credit, bad credit, money always tight, etc. That’s why those ads for “very bad credit personal loans” start looking attractive to you.

Whenever you’re in the position where you feel like, “if I could just borrow $X …” you’re in the trap. I’m not saying that borrowing the money is a bad idea. It might be fine if you also correct the underlying spending problem.

I know that the trip from overspending to having a balanced budget or even a surplus can be a long and painful one. If you lost your job, had a business fail, got injured, seriously ill or otherwise experienced a long term loss of income it’s daunting indeed. You will very likely have to make some hard choices and change your lifestyle in order to get back on track. Most people try to get another job or get their income back to where it was before they consider making major lifestyle changes in order to straighten out their budgets. That’s fine. It really doesn’t matter how you get your budget straight. All that matters is that it gets done.

All the “very bad credit personal loans” and “guaranteed approval! bad credit ok!” type lenders aren’t going to dig you out of the hole you’re digging. The only thing that’s going to do that is to get your income over your outgo. One way to reduce your outgo is by consolidating credit card debt and other unsecured debts. Don’t wait until you’re in so deep you need to declare bankruptcy.

Consolidating Credit Card Debt 101

What does “consolidating credit card debt” actually mean? Well it depends on where you look or who you talk to.

You can refinance your house or take out a home equity loan to pay off your credit cards, thereby consolidating credit card debt into a home loan.

You might get an unsecured loan of sufficient size to pay off your credit cards, consolidating your credit card debt into that loan and reducing the number of payments, and maybe the total amount you eventually have to pay to pay them off.

You might enroll in a credit counseling or debt management program and have them make the monthly payments for you, possibly at a lower interest rate, consolidating your credit card debt into that program.

You might even consider consolidating credit card debt into a debt settlement program in an attempt to reduce the total amount you pay on your debts substantially through negotiated settlements on the balance due.

All of those options could be categorized as consolidating credit card debt.

Now the question is which one is right for you? The answer to that question depends on a number of factors. One factor is your credit score. Another is your income. Perhaps the most important factor in determining which method of consolidating credit card debt you want to use is your budget.

Both of the loan options require a good credit score and sufficient income to support the loans.

The credit counseling/debt management options require that you have nearly enough in your budget to make the minimum payments on your debts, but credit score doesn’t matter.

The debt settlement option has the lowest cash flow or credit requirements, and is best suited for people who can’t afford the other options but want to avoid bankruptcy. Though you could use debt settlement at any point there are some significant drawbacks to doing so. If you go into debt settlement when you’re current on your debts and able to stay current you’ll take significant hits on your credit report and open yourself up to the possibility of lawsuits. If you’ve had a reduction of income for whatever reason, and can’t afford to pay your debts, you’re going to take the credit hits anyway. Thus debt settlement can be a viable method of consolidating credit card debt for people in those circumstances.

There are several options for consolidating credit card debt. Whether you should actually use any of them depends on your budget and your financial goals. Choose wisely.

Give Yourself a Raise

Do you get large tax refunds every year? If you do, I’m going to show you how to give yourself a raise by ensuring you are not overpaying your taxes during the year. When you have too much withheld from your paychecks you are giving the government an interest free loan from every check. This is money that you could use to pay down debt.

Some people would argue that the extra withholding is an enforced savings that they would not have if they didn’t do it this way. I suppose that would be true if they had no self-discipline and if getting out of debt is not a priority for them.

Here’s why you’re better off getting that extra money in your take home pay and putting it onto your debt. Let’s say your have one dollar over and above your required taxes withheld (loaned to the government) in April 2009 and then refunded in April 2010. You put in $1 and you get back $1. If, instead, you get that dollar in your paycheck and you pay one dollar over your minimum payment amount in April 2009 on a credit card with a 14% interest rate, by April 2010 you save $0.14 cents in interest that you won’t be billed for because of that extra one dollar payment. Basically having the government hold onto that dollar for a year costs you $0.14 even if you pay the extra dollar in April 2010 when you get the refund. You can figure out your actual costs based on your average refund amount and interest rates on your debts. The cost of overwithholding taxes from your paycheck can really add up.

It’s a simple matter to figure out how much should be withheld from your checks. The most popular financial software programs (Quicken and Microsoft Money) have withholding calculators built into them. I personally recommend the method that anyone with an Internet connection can use, the withholding calculator on the IRS website www.irs.gov. You’ll need your most recent pay stub and last year’s tax returns when filling in data on the calculator. At the end, it tells you what your exemptions should be. Take that information to work and fill out a new W4 form with your employer. Your take home pay will go up shortly afterward. You’ve given yourself a raise.

Out of debt already? Then the money can go into savings. If you have direct deposit you can split your paycheck between your checking account and your savings account. Just don’t spend the money in the savings account. Even with the super-low interest rates on savings accounts this practice will net you more than letting the government hold onto it. If you don’t have direct deposit you can set up an automated transfer from your checking to your savings the day after every payday. Just make sure you account for it in your check register!

How to Stretch Your Holiday Budget

In tough economic times with high unemployment, staying on budget is more important than ever. Many people find it very difficult to stay on budget during the holiday season. You can have a very happy holiday season and stay on budget.

Plan your holiday budget early. The earlier the better. Determine the total amount you can afford to spend for the holidays. Break down your holiday spending into categories such as gifts, decorations, travel, holiday meals, etc. Assign realistic spending limits to each of those categories.

Give the gift of time or your particular talents. For example, give a relative with young children a coupon for one (or more) nights free babysitting. You get to spend time with the little ones and they can go out to dinner or something. If you happen to be able to knit, you could knit sweaters for your family. Be creative! You’d be surprised at the number and variety of gifts you can give that cost you little or no money. These kinds of gifts may mean more to your family than anything you could buy at the store.

When you go gift shopping, make a list and stick to it. Before going to the mall break down your gift budget to specific amounts you’re going to spend on each person on your list. Stick to your list and don’t overspend.

Utilize debit/credit card rewards programs. The best programs build up points that you can use for a variety of goods and services. My bank offers a rewards program attached to my debit card. I utilize it as much as possible. As a result, I have not paid a penny for Christmas gifts for the last two years. I purchased all of the gifts I gave with rewards points.

Turn holiday get-togethers into pot lucks. A fun way to save a little money on those big holiday meals is to turn them into a kind of pot luck. Your family or friends would probably be happy to contribute a dish to the meal. You can save money on holiday groceries this way. The added bonus is that since others are doing some of the cooking you’ll spend less time in the kitchen and more time with your family or friends.

Plan for next year at the end of the holidays this year. As soon as the holidays are over do your holiday planning for next year. Work out your overall budget and break it down into categories. Capitalize on post-holiday sales.

For example, greeting cards can be a big expense for people who have large families and many friends on their lists. The best way to save on these is to buy them after the holidays. I have purchased cards the day after a holiday for as much as 75% off their normal retail price. If you feel like haggling a little you might be able to get an even deeper discount, considering the store is going to have to take down their display and store the merchandise somewhere. They’d rather sell it. Unsold holiday products in a warehouse or store room are a loss for the retail store.

With a little planning and effort you can have a wonderful holiday season without breaking your budget.