Thursday, October 29, 2009

Should I use a student loan refund to pay off my credit card?

Today a credit card debt question from @miss_mielle on twitter:
There are a lot of personnel changes at my job, so I'm getting back in school ASAP. I've been putting it off to pay off some cc debt but it's gonna take a while and I don't want to wait anymore. A friend of mine suggested taking the max on an edu. loan and paying off my debt with the refund checks. It sounds viable, esp. since my debt isn't extravagant(<$7500). What do you think?
I'm on payment plans on both cards, but they will still take a while, and I'm unable to get some things I REALLY need meanwhile
First, thanks for the question. I'm glad you're committed to paying off you debt and for being proactive about the situation at your job by seeking more education. (MESSAGE: Learn to feel which way the wind is blowing at your job and never wait for a layoff to be looking for new opportunities!)
Still, I have to challenge some things you said. First, I can't tell what your debt-to-income ratio is because I don't know how much you make but I'm not sure I'd say $7500 on credit cards "isn't extravagant". I had about that much last year and I was stressed as all hell trying to pay it off. True, it might not be as much as may others have, but you're not paying their bills, you're paying yours, right? Can you even remember everything you bought with that $7,500? I say all this not to berate you but to get you to rethink you habits after you've paid this debt off.
As far as the debt payment strategy your friend suggested, I think you need to consider a multitude of factors. On the surface it looks like that would be the simplest thing to do: by paying the credit card debt with your student loan, you're basically consolidating all that debt into one payment. But will that payment be less than you'd pay with a separate student loan and credit card payment? What's the interest rate on the loan compared with the rate you're paying on your card (it's almost certain to be lower than the card rate, but still, check).

Also, are you getting a federal student loan or one from a private lender. Private lender loans tend to come with higher rates and tougher repayment terms than ones given or backed by the US Department of Education.

Lastly, whether you take the larger loan or not, how are you going to make the payments if you're not working (or working less) to accommodate school?

Think about all those things before making a decision.


Yantuar said...
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Student said...

Credit card companies typically employ a very sly tactic in getting college students to register new credit cards. They usually give a very low interest rate for the first year. After the first year, the interest rate will begin to increase. Fortunately, since college students are still very young, their credit cards' limits are a lot lower than their adult counterparts who are in the corporate world.