Nursing a Debt Hangover From College
Here's a college course you probably never took: Managing Debt 101.
Many grads emerge from college with more debt than their yearly salary. According to a study by student lender Nellie Mae, the average grad has nearly $28,000 in debt -- and that's just student loans. Add in the credit-card bills, car loans, insurance, utility bills, rent or mortgage and daily expenses, and it's enough to make you want to bury your head in the sand.
In recent years, many survived by relying on record-low interest rates. But rates could rise again by summer or fall. So it's a good idea to lock in the best rates you can and get your debt under control now. Start with the basics to financial health: Keep bills organized, make all required minimum payments and pay everything on time.
Once you're organized, you can find ways to shrink your debt -- or at least make it less burdensome. Here are some strategies:
Credit Cards
Consider the 0% Transfer Deals. The standard credit card today carries an annual percentage rate of around 13%, according to Bankrate.com. That's more than double the rate on most auto loans and sometimes triple student-loan rates. This "bad debt" should be the top priority to pay off.
Consumers can take advantage of "introductory" offers from creditors and switch cards until the balance is paid off. For instance, many cards now offer 0% interest on balance transfers. You transfer a balance from another card and pay no interest on it for a year or longer. Once the offer ends, you can change cards again.
One caution: Some banks attach transfer fees of up to $50, so read the fine print. Also, these cards can carry high annual percentage rates on new purchases. When you try to pay new charges off, the payment might be subtracted from the balance costing you 0% rather than from the high-interest balance. Usually it's better to keep just the transferred balance on these cards and use a different low-rate card for purchases.
Also, think about negotiating with creditors for better rates and waived fees. Scott Bilker, author of "Talk Your Way Out of Credit Card Debt," says consumers can save money simply by calling the creditor and demanding better rates. His strategy involves keeping open several lines of credit, switching cards regularly and transferring balances to flex financial muscle.
"The only way you can really make them feel pain is to transfer your balance," Mr. Bilker says. Every bank should waive at least one late fee if you request it, he adds. "If they don't do that, I'd leave."
Also consider consolidating your credit-card debt on to one or two cards. Many department-store cards carry APRs above 20%. Call the creditor and see if you can lower your rate, or consider transferring the debt to a lower-rate bank card.
If a bad credit score (yes, creditors keep score) is disqualifying you for credit, improve it by paying bills on time and reducing debt. Scorewise, it's better to have several credit lines with ample available credit than a couple of maxed-out cards. So don't rush to close out old cards.
Student Loans
Lock In Best Rates Early. The U.S. government regulates education loans, thus giving borrowers more flexibility and fewer penalties than other debt. While it's still vital to pay the minimum on time, it can be financially beneficial to pay off student loans over many years -- or even decades.
A key decision is whether -- and when -- to consolidate. Consolidation can help you extend your loans beyond the standard 10 years, reducing your monthly payments and often lowering rates. There are no prepayment penalties. Most people can consolidate only once and often it is best to do it within six months after graduation, since that is when you qualify for lower, "in-school" rates.
Student loan rates get reset every July 1 and stay constant for an entire year. Different loan types have different rates. The Stafford federal-loan rate now is 3.42% (the in-school rate's 2.82%).
A new rate will be announced after the federal Treasury bill auction in late May, so you have time to decide whether to lock in this year's rates or wait until after July 1. When you consolidate, your new rate from federally approved lenders such as Sallie Mae reflects a weighted average of the consolidated loans. Some lenders give extra incentives such as slightly lower rates for people who consecutively pay on time or pay by direct withdrawals from a bank account, so shop around.
A big perk for student loans: They come with several options for delaying payments if you can't afford them. Many young adults don't know their options, however, and wait until it is too late, says Mark Gazda, president of Answer Company, a Massachusetts student lender.
A student loan, for instance, can be automatically deferred for up to six months after graduation -- longer if you're jobless, in the military or a very low earner. Deferment is a grace period you have to put off paying the loan, sometimes interest-free. If it's too late to defer and you're strapped, consider forbearance. A student loan can be in forbearance for up to three years, for a maximum of one year at a stretch, Mr. Gazda says. While technically you must be financially pressed or in bad health to get forbearance, most lenders will do it if you ask. You should ask before you risk default, he says. (A student loan defaults once it is 270 days late.) "The lender often doesn't tell you about these things unless you ask," he says.
Auto Financing
Get Offers Before You Buy. Nabbing the best rate on an auto loan often is a matter of shopping around -- before you set foot in a dealership. Many people mistakenly accept dealer financing without researching other options first, says Gerri Detweiler, a debt expert in Sarasota, Fla. Dealer rates sometimes top 10%. The average APR on a car loan today is about 5.6%, says Edmunds.com, a consumer Web site. That's down from 7.3% two years ago.
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