Best money bets for college students

A question I get asked often is for advice for college students. One of my Twitter followers, @BeForREAAL, brought the topic up last week:

My thoughts on that question never waiver: the best financial decision college students can make is to avoid graduating with unnecessary debt. The two most important ways to do so is avoid over-borrowing for school (i.e., borrowing for more than tuition, fees and books instead of working to pay for incidentals), and using credit cards for non-essential purchases. The average college student in the 2008-2009 school year had borrowed more than $23,000. That's a lot to have to pay back -- with interest -- in a tough economy where it's hard to find a job.

I opened the question up for my timeline and got some other answers:

Pretty sound, common sense advice. What else would you suggest?

Can I save for a home and pay off my debt at the same time?

Sorry for being gone for so long; the month of April was ridiculously busy at the 9 to 5. But I'm back strong and with a good question that came from formspring:

I'm almost debt free and I want to start saving for a down payment. How can I aggressively tackle the last credit card...and save at the same time?

My advice: Don't spread yourself too thin. You have a finite income and that money only stretches so far. If you're almost debt free, you should devote as much of your income as you can to paying off the debt until it's gone. That will help you as much as saving for a down payment (on a home, I'm assuming) because lowering your debt will help improve your credit score. When the debt's gone, take the money you were putting toward that and apply it to a down payment. Take your time and remember you can't do it all at once.

Also, how much money do you have in an emergency fund? If it's less than six months worth of your living expenses, that should be your priority over both a down payment and paying off debt. What you don't want to do is be in a situation where you've got to run up credit cards or beg, borrow and steal if you should  lose your job.

Good luck.

Are you getting a good deal on your credit card? Take our survey

Credit card reform went into effect earlier this year with a number of significant restrictions on fees and practices that should benefit consumers. That was the good news; the bad was that before reform took effect, many consumers saw interest rates skyrocket on their cards, often with no explanation from the card issuer. 

Were you one of the lucky ones whose rate stayed the same or were you whacked with a big interest rate increase? Take my survey on credit card rates and help me with later posts looking at how readers like you have been affected by the changes.

All responses are totally anonymous; I'm not collecting any personally identifiable information -- no names, no addresses, no email addys.  Thanks.

How can I save as much of my tax refund as possible?

A great question from one of my formspring followers:

As one of the fortunate folks who MAY be getting a refund, what tips would you suggest to save as much as one can of said refund?

I can't say this enough to people: getting a refund only means you've paid the government more than you should have all year long. They take that money, use it for other stuff and give it back to you months later with no interest. Great deal for them, sucks for you.

Were I you, I'd readjust my withholding to make sure you're only paying what you should and hold onto more money throughout the year. That's a better way to save because you'd get that full year to earn interest on all that money rather than getting it all at once having received no interest from the government at all.

But that won't solve the dilemma of how to save the refund you already have coming. My advice would be to start wherever you can get the biggest return. Often that's by paying down debt as opposed to putting the money into checking, savings or investments. Sounds counter intuitive but it's not.

Think about it: if you have a credit card balance that you're paying 18 percent interest on, you save more -- at least in the short term -- by paying that balance down or off than you would by putting the same amount of cash into an account or investment that returns you five percent.

If you have no credit card debt, then look to beef up your emergency savings. You should have at least three months' worth of living expenses stashed away in cash somewhere (and by somewhere I don't mean under a mattress).

If you've done both of those things, you're in great shape and might want to try this little trick that would help you save AND reduce your tax burden for next year. Open an IRA or contribute to the one you currently have by putting the money you got from this year's tax refund into that account.

When next year's taxes come around, some of that money that you put in might be tax deductible, as is the case with many IRA contributions. Check with your financial adviser of the bank handling your IRA to be sure of the rules and exact tax ramifications. Good luck.

image: Viola Joyner/photoxpress.com

New credit card rules in effect today

Today's a day credit card holders should celebrate. It's also one we should fear.

Strong new rules to protect consumers from predatory banks kick in today. As of now, it's illegal for your credit card to:

• raise your interest rate for no reason;
• raise your interest rate because you're late paying a different company;
• raise your interest rate on new purchases in the first year you have the card;
• play games with your monthly payment due date;
• cut your credit limit then slap you with a penalty for going over;
• charge you an extra fee for paying by phone or online;
• issue cards with fees more than 25 percent of your balance.

Maybe the biggest change is that credit card companies now must tell you how long it will take you to pay off your balance if you pay the minimum. So if you're paying 18 percent on a $5,000 balance with a minimum monthly payment of $150, your lender now has to tell you that it'd take nearly four years to reach a zero balance.

Those are all good things, but now for the worrisome part: All the changes are going to cost the credit card companies billions in revenues, so they're likely to cook up some new tricks. Credit card companies are expected to keep dropping customers like they have been over the past year, to raise rates overall and start charging annual fees.

How she got out of debt - 3 times

Yesterday, I gave an encouraging update on a reader who is taking my $0 Balance Challenge has has paid off nearly 50 percent more of her credit card debt in three months than she planned to.

Today, I want to share the story of a personal friend who, having read about the challenge, wanted me to use her as an inspirational example. She asked that her name not be used, but a few things I can tell you is that she's a single, professional woman with a solidly middle-income lifestyle who worked hard to rack up credit card debt and harder to get out of it.

Here's the rest in her own words:

I have always had an up-and-down relationship with money, including 3 rounds on the credit card merry-go-round. When I graduated from college in the mid-1980s, I was blessed to have no student loan debt. But I succumbed to the lure of easy credit cards. The first round wasn't too bad, and it only took a year to pay them off.

Then came the 1990s. I got my dream job and, thanks to a series of promotions and bonuses, I was flush with money. Back came the credit cards and large debt. I enrolled in Consumer Counseling Credit Service, and this time, it took three years to pay them off. At that point, I swore off credit cards and actually lived within my means. My only debts were my car (a reasonable car with a reasonable payment) and my mortgage.

Then in 2005, I found out two things: one, I eligible for a nearly $12,000 credit limit with 2 credit card companies; and two, I became pregnant. You can almost guess what happened next. I used the credit cards to take care of things while I was on maternity leave. The next thing I know, I was $10,000 in debt. I left my job to take another that came with a $10,000 pay cut. So in March 2005, I called CCCS again and joined the program.

The program had changed since the last time, and I had access to some great tools to help me stay on a budget and learn how to better spend -- and save -- my money. I made my last payment in December. This year, I managed to buy nice -- but modest -- Christmas gifts without having to break out the plastic. Not that I could, because I don't have plastic anymore.

My plan now is to double my car payments and have that paid off by the end of the year. I have a nice little rainy day fund, and have no plans to get another credit card anytime soon, despite the best efforts of credit card companies to tempt me. I have just called to opt out receiving any future offers. Can I add how amazed I was that even while in debt and the tight financial markets, credit cards were still trying to woo me?

I won't say the process was easy. I decided to be aggressive and pay $500 a month to get rid of my debt faster. I worked with the non-profit CCCS to negotiate my credit card interest rates. I had to learn to live on -- and stick to -- a budget. I had to tighten my belt and cut out some of the things I really enjoyed. But I kept my eye on the prize and once that car payment is done, I'll be completely debt free. I have a retirement to fund and a child to get through college.

And please -- don't tell me you can't live without a credit card. I have been doing it since March 2005. I've bought plane tickets, rented cars, paid for hotel rooms and handled everything else using only my debit card.

I paid 99 cents to download the Big Spender app on my iPod Touch and I'm tracking EVERY penny I spend in 2010. You can follow my adventure at http://spender2010.livejournal.com/. Sometimes you need to actually see where the money is going, people!

I challenge all of you, Keith's loyal readers, to make becoming credit-card free and getting your financial house in order a priority in 2010. Cheers!

Pay more than the minimum on your credit cards

Today, an update to the $0 Balance Challenge:

Last October, a reader wrote in that her goal was to eliminate $8,157.48 in total debt she had on two credit cards over in twelve months. Not an easy goal given the payment arrangement she worked out for both cards has her sending in only $200 a month; at that rate, she'd have paid $2,400 in 12 months with some percentage of that being eaten up in interest payments.

Three months in, though, there has been progress: I've managed to pay off a little more than $1200 and I'm quite excited. Still, I have a long way to go and staying focused on paying down the cards is quite challenging. For the past few months I've stuck with the minimum payments but when I get "extra" money, usually from baby-sitting or freelancing, I always some put money towards the cards. I've put the most money towards the card with the highest interest rate.

Plan for 2010: Increase my minimum payments from 80 per month to 120 per month on card #1. Commit to contributing a set percentage of "extra" money to paying down the debt on top of regular payments. I'm not sure how much of my "extra" income should go to paying down debt though, guess that's something to think about.
First, CONGRATULATIONS! By finding a way to pay more than the monthly minimum, you've eliminated in three months what it would have taken you six months to pay. That's wonderful and it shows how one of the most important principles of paying off debt works: pay more than the minimum.

Paying more than the minimum on your credit cards not only means you'll get the debt paid off faster, but it saves you money by eliminating interest payments from the end of the loan. Remember: any interest you pay is compounded and tacked on to every monthly statement. That means the longer you take to pay off your credit cards, the more you're going to pay in interest.

As far as how much extra you should pay each month, pay what you can afford. Freelance income isn't necessarily steady, so don't budget for the same amount every time. That said, pay as much of that money to the card as you can afford to, but make sure you save at least 15 percent of it in a separate account so you don't wind up like I did: a $0 Balance on my credit card but a big tax bill.

Beware of debt consolidation schemes

As the $0-Balance Challenge goes on, I'm getting more questions from people who are committing to paying off their credit card balances and want to know the best way to go forward. Like this:

I'm in the process of eliminating my credit card debt. I don't use the cards anymore and I recently set up payment plans. I hear about these services that consolidate all your debt so you only pay one "low" amount a month. Seeing as though I'm paying off two credit cards and student loans, is something like that worth looking into or should I keep doing what I'm doing?

I'll answer your question with a slogan I saw on a bus billboard the other day. It said, "Danger. Debt consolidation could cost you your home." It was a warning about scam artists who target people in trouble with their mortgages with 'consolidation loans', but I think the DANGER message applies to ads about credit card debt consolidation every day on the sports talk station I listen to and I shudder.

Why? Because what most people don't know about these operations is that many of them are owned by the very credit card companies they claim to be helping you get out of debt with. Think about it: how else would some random company or 'nonprofit' be able to negotiate a settlement on your behalf with a behemoth bank? And that's just in the best case scenario; in the worst case, debt 'consolidators' are pure, outright scams who will take your payments and never turn over anything to a credit card issuer or worse: steal your personal information and perhaps make your credit worse.

While there are a few legitimate debt consolidators out there, the truth is most people don't need them. Unless you're buried under so much debt it's impossible for you to get out (in which consolidation wouldn't help but Chapter 7 might), you don't need a third-party to consolidate your debt. If you've already set up a payment plan with your card issuer that's affordable, stick to it and remain disciplined about not using the card any further. That pays off in the long run without the worry of being scammed.

image: freedigitalphotos.net - Michelle Mieklejohn

21 days without spending money

Think you've got financial discipline? Could you go 21 days without spending a dime on anything besides necessities (and I mean real necessities, I-really-need-these-shoes necessities)?

That's a challenge personal finance columnist Michelle Singletary is issuing to her readers in promotion of her new book. I've done this kind of challenge before myself, although more out of necessity than trying to see how strict I could be on myself. It reminds me of what my friend The Frugalista did a couple years back that gave birth to her blog.

It's an interesting experience and definitely the kind of thing that builds a certain level of character. Most of us don't realize how much money we're wasting unless we stop spending altogether and look at how much money we have left over. This is also the kind of thing that can help you with making a decent budget and with shedding your credit card debt. Once you realize how disciplined you can be with your disposable cash -- and indeed that you actually have disposable cash -- you can start putting it toward the balances you have on your cards.

So how many of you are willing to try Michelle Singletary's
21-day challenge? If you do it, let me know how it's going.

A $199 Nintendo Wii for only $347!

The holiday shopping season is in full swing, so it's appropriate to offer yet another lesson in why shopping with credit is an awful idea and in why you have to be careful when considering what seem like "easy" payment plans.

Today I was in my gmail account and up pops an ad for a web site called AffordIt.com. "Buy a Wii for only $16/wk", it said. I gave it the instant #sideeye and out of cynicism clicked over to see what the rest of the terms were. Here's what I got: AffordIt will give you "low weekly payments" and "Instant Approval" to buy your Wii (and ostensibly whatever else they offer.

The devil, of course, is in the details. In this case, you start by making a $59 downpayment after which you make $16 payments each week for $18 weeks. I'll spare you the time doing the math: it all adds up to $347, nearly double the cost of the same Wii in stores. You'd actually come out better buying the thing all at once, even if you used a credit card, so long as you paid it off before you got hit with too many interest payments.

Oh, and speaking of that: since you'd be buying online from AffordIt, you'd still be putting that $347 Wii on a credit card anyway (unless you used a debit or check card), which means your actual cost could still skyrocket with the added interest you'd be paying your bank.

Folks, if ever there was a lesson in the value of delayed gratification, spending within your means and not trying to take shortcuts, this is it. If you can't buy it outright, you cannot AffordIt.

Black Friday: The day debt takes over

"Black Friday" is over, but that's only the beginning of the holiday shopping season. And that means it's only the beginning of a lot of trouble with debt for some consumers.

Black Friday is a great name for the start of holiday shopping not because it's the day that most retailers turn a profit for the year (which is actually no longer true), but because ominously, so many people doing their holiday shopping start plunging into credit card debt when the doorbuster sale ads start appearing.

Consider: The National Retail Federation said that holiday shoppers spent a total of $41.2 billion last weekend, with the average per-person being $343.31. That's less than the $372.57 per person consumers spent last Black Friday weekend but still, more people plan to use their credit cards for holiday shopping --28.3 percent -- than cash --about 25 percent.

Last year the numbers were worse, with more than 30 percent using credit cards for their holiday shopping. But think about it: even in this economy, even with credit card issuers jacking up rates sky high, nearly a third of consumers are buying holiday gifts on credit.

Since most people don't carry around as much cash as is available on their credit cards (and many don't even have that much in the bank). That makes it easy to overspend especially when every store you walk past has a sale going on.

So if you're shopping this year, try to live by two simple rules: 1) Make and stick to a budget and 2) spend it all in cash. If you can't pay for it up front, you don't need it, no matter how cheap it is.

Is your 'ideal mate" checklist keeping you broke?

I'm stealing today from another blogger. Adrienne Samuels is Ebony magazine's senior writer and someone I count among my best friends and favorite people on earth. Yesterday she blogged her take on the flaws with many young people's approach to coupling.

Why's that relevant to a blog about personal finance? Because like I've stated before, even in my own singleness I understand the connection between marriage and accumulation of long-term wealth. But Adrienne takes it a step further, drawing a connection between how you date and how you think about choosing a partner and your long-term wealth potential:

Look around at folks in their 50s, 60s and 70s. The reason why many of them...drive Cadillacs, have big houses, tithe thousands of dollars to church and can take fab trips to Athens or to Jamaica now that their kids are out of college is because they pulled their money together and made their finances WORK when they were a young couple.

Everybody wants the perfectly perfect mate with the perfect social status, income, car, home, brains and physical looks. Everyone wants to marry up. But guess what? Marrying up is a fairy tale ideal that doesn’t really translate well to today’s society. You want up? Get up there yourself.

One caveat to a point she made: Baby Boomers didn't all get the trappings of success because they married and worked real hard. Our parents' generation also left a legacy of messy, costly divorces and financed much of their lifestyles with credit, a legacy that we're all paying dearly for now.

Still, Adrienne's point holds. Too many people want for insta-fab relationships that come with all the luxuries of a romantic comedy where everybody lives fab and has no wrinkles (think The Best Man, "The Brothers"). She offers a much simpler, more workable approach:

Rather than looking for a rich mate, why not look for a mate to get rich with?

Read Adrienne's blog here.

College students' credit card debt soars

A comment to a previous post about college students and credit card debt inspired today's post. "Student" writes:

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.

You're absolutely right, and I'd add that credit card companies use many shady tactics to get students to sign up. In a previous post I wrote about how one of my college hustles was working a table giving away 'free' t-shirts to get students to sign up for credit cards. I got paid in cash and my classmates got shirts they never wore and a mountain of debt.

One thing I will challenge is your statement that students' credit limits are necessarily lower than working folks. It is true that students have lower incomes and should have been given very low credit limits but lending standards were so lax for so long that many students left school with just as much credit card debt as working professionals. College seniors with at least one card last year graduated with an average of more than $4,000 in credit card debt.

Nightly Business Report & a Question About Credit Cards

My appearance on Nightly Business Report went well: I took credit card companies to task for their arbitrary rate hikes and challenged the notion that they're good for the bottom line over the long-term, especially if consumer confidence is damaged.

I couldn't embed the video, but click here and scroll to the 22:30 mark to watch my commentary.

In the meantime, my twitfam had questions sparked by the commentary. @futurechefbelle asked, "What do you recommend a student to do as far as credit cards are concerned? Should we wait for the economy to bounce back?"

Answer: Most people should have a card for STRICTLY emergencies or when you absolutely need one. Even some discretionary activities like renting a car or a hotel room or even getting an airline ticket are hard to do without a card.

Keep in mind that credit cards in and of themselves aren't evil, (although @grahamesq tweeted me this gem: "My dad has been preaching to me since I was about 8 that credit cards are 'economic suicide' "). What is evil is the abusive relationship most of us have with our cards, buying things we know we can't afford under terms we know are to our disadvantage using money we borrow from modern day corporate shylocks.

You can, and probably should have a card, but like insurance, it's something you want to have but rarely, if ever need to use.

Jacked up rates: Reason #1 to pay off that credit card

When I decided to challenge you to get rid of all your credit card debt, I had no idea that the banks would hand all of us a built-in motivator. But they have: jacking your interest rates up sky high for no reason.

Months ago, a few stories warned that these kinds of rate hikes were coming but at that time I didn't know anyone it'd happened to. But now? Just this morning, I asked the question on Twitter and within three minutes, three of my followers said that their card issuers had jacked up their rates without warning and with little explanation.

That's not counting the real-life people I know: one whose rate was kicked up 14 percentage points though he's paid on time for four years; another with a FICO score above 800 who got a note saying her rate was climbing to a whopping 37 percent. Yes, 37.

I point all this out to answer the question I got from friend who wanted to know if he should pay off his $1,300 Citibank Visa balance. Though he recently lost his job, he and his wife have significant savings. Should he pay the balance off completely or pay half of it?

In most cases, I'd argue pay just the half: the balance isn't that high and being unemployed, you want to preserve cash. But with banks killing cardholders with rate hikes, keeping any credit card balance that you can otherwise pay off is too risky, especially if you have enough cash on hand to pay it off and still have significant savings left over. Since your wife is still working, cut back on other kinds of discretionary spending and make the single income work for as long as you can while looking for a job, but pay that balance off!

And that goes for the rest of you: this is NO time to be keeping a credit card balance. The banks have shown that their bottom line is the bottom line. They've taken all the bailout money we gave them from our taxes and paid us back by taxing us more via higher interest rates. They ain't playin', nor should you be.

Today on Nightly Business Report

Today I'm taping a commentary for Nightly Business Report, which airs nationally on PBS (click here to find out your local airtime).

I'll let you know when it's scheduled to run, but until then, you can read what I have to say below:

I've got a deal for you: I'll buy you whatever you want, no questions asked. Just pay me back over time, plus a little extra for my trouble.

Make that a lot extra. American consumers are saving a decent percentage of our incomes for the first time in decades but those savings could be overtaken by payments on our consumer debt given the arbitrary interest rate hikes being imposed by our friends, the credit card industry. I say "friends" because taxpayers have given credit card issuers billions in bailout money and I tend not to give money to people I don't like. You'd think they would be decent enough to let us off the hook for some of what we owe them.

Instead, they're slapping around people like the guy who emailed my blog complaining that he hadn't missed a payment in four years but still wound up with a 14 percentage point rate hike on his Visa card.

Not that consumers are innocent; I just finished paying off a $9,000 credit card bill from stuff I bought too long ago to remember. Still card issuers need to consider whether slamming already strapped consumers is really good for business. The economy wont fully recover until consumers are confident enough to spend, which fuels the credit card business. I don't know about you, but having a card in my pocket and an anvil over my head doesn't make me feel all that confident.

I'm Keith Reed.

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.

A freeze on credit card rate hikes?

How would you like it if your credit card rates were frozen so that your card issuer couldn't raise them for a few months? Most of you would love it, I'm sure, especially if you're taking the Zero Balance Challenge or if you're like the guy who wrote me last week about his credit card jacking up his rates:

I'm usually good about knowing how much interest I've accrued on a credit card in a given month. So when the balance of a card I've been furiously paying down was about $6 more than I expected, I wondered what was going on. It was too much for it to be simply that an introductory rate had disappeared.
Come to find out my APR had been increased. That one went from 15.40 to 21.74. According to HSBC, which holds the card: "Your interest rate structure is changing because everyone that has your current interest rate structure is being increased to the pricing terms listed below."
I can exercise my right to reject the changes before 12/09/09, but, as of my last statement, they're there.
I have another card that I've now been told had an introductory rate of 9.9, then went up to 16.99 after that intro rate was done. I don't keep a high balance, so I didn't really notice.
Then I put a big purchase on it. I figured what the hell, right?
Yeah, til I got like 35 bucks in interest added to my account. The new APR for that account is 23.74% The lady in India who answered my call -- this is a Chase account -- said I'd been sent a notice in the mail in late June-early July. I never got it as I was in the middle of moving.

Damn. there's a lot that bothers me about this story on both sides: someone who's carrying a balance on his credit cards absolutely needs to pay attention to the notices they get in the mail from the card issuer to avoid missing fine print about rate increases and other new fees and tricks the companies play. I'm also a little astonished that the writer would add a new, major purchase to a card that already had a balance on it with such a cavalier, "what the hell" attitude. That's simply ASKING for it from your credit card company. Whatever you bought, did you really need it that bad that you were willing to make installment payments on it at a high interest rate? So many people talk about going on debt diets when what we really need is debt rehab. Get off the card!
On the other hand, if what the writer is saying is true (and for the record, I haven't called HSBC or Chase for their take), the card issuers don't deserve any slack here, either. Since credit card reform was passed earlier this year, credit card issuers have been using any excuse (and sometimes none at all) to jack up customers' rates, add new fees and in some cases cancel cards altogether before the new law takes effect.
Which brings me back to the proposal in Washington of a moratorium on new rate hikes until credit card reform takes effect next year. The proposal, from Sen. Chris Dodd, isn't supposed to have much chance of passing.

How many of you think it's a good enough idea that you'd be willing to call your own Senator to make your voice heard?

image: freedigitalphotos.net

$0 Balance Challenge: Paying off $8,157 in credit card debt in 12 months

Hope everyone had a GREAT weekend. I'm starting off this week with a little update on the $0 Balance Challenge. I got an email a little while ago from a woman who's looking to get rid of $8,157.47 in credit card debt over the next 12 months:

In June 2008 my graduation present to myself was Suze Orman's Young, Fabulous & Broke. I was constantly being harassed by creditors. Suze said I should pick up the phone and talk to them, so I did. I set up a payment plan $80 per month on one card, $120 per month on the other. I haven't missed or been late on a payment.
The great part of the arrangement was that they cut my interest rates and there are no late fees. The bad thing is that the cards are closed. At the time I didn't realize that they would be closed or what that would mean for my credit score. I am now working to pay the cards off and since my score is too low to get a credit card, I am thinking of getting a secured card to help rebuild my credit.

Card #1 $3,175.49
Card # 2 $4,981.98

I will definitely have the 1st card paid off w/in the next year. If I have most of the 2nd one paid off by then I will be extremely happy. The goal I'd already set for myself was to have 0 credit card debt by my 25th birthday. Also, I ran up my cards on books, flights back home for the holidays, a car that kept breaking down, etc. Eventually, I stopped using the cards, but since I couldn't pay, the interest rates and late fees kicked my butt.

This is a great example with a lot of lessons in it for those taking the challenge. Among other things, the writer noted that she is working part time and has student loans to pay, as well. This is a pretty common situation for recent college grads, many of whom find themselves underemployed and stretched with debt once getting out of school.

First, it's a great thing that she got proactive and worked out a payment arrangement with her creditors. I'm hoping that in addition to that, she got everything in writing, in case there are any problems later. She might also want to write the three credit reporting agencies (Experian, Equifax and Trans Union) and ask that a note be inserted in her file explaining that she's worked out a payment plan with the creditors who she's been delinquent with. It won't help her numerical score immediately but it could help if for some reason another lender pulls her report anytime soon.

For someone working part-time and living on their own, it might be a bit of a stretch to pay off nearly $9,000 of debt in 12 months. According to Bankrate.com's credit card calculator, it would take monthly payments of $279.55 to pay off the first card in a year's time, assuming an APR of 10.25 percent and no other fees, and $438.57 to pay off the second card. Right now her payment arrangement calls for far less than that, so getting to zero won't happen unless there's extra money in the budget for more payments.

Still, that's OK. There's a workable plan in place and since the cards are closed, there won't be anything new added to the balance. If she's diligent, she'll be celebrating a zero balance before too long. Good luck.

image courtesy freedigitalphotos.net

Is it hard for couples to talk money?

Hope everyone had a great weekend and got a good start on your $0 Debt Challenge. By now, you should have taken account of how much total credit card debt you have, looked at your own budget and decided whether you're going to pay off one card or all of your credit card debt over the next 12 months. You should have found some image - whether it's your last bill or something you'd like to buy or do when the card is paid off -- that will motivate you to stay on task. If you're already credit card debt-free, you should be envisioning your next outlandish goal. Either way, I'm looking forward to hearing from you with you all with stories of your progress. Good luck.

Now for today's topic: money and relationships. On Tuesday at 1 pm Eastern, I'll be on Blogtalkradio talking with Corynne Corbett of ThatBlackGirlSite and journalist S. Tia Brown, answering the question of why it's difficult for couples to discuss money. We're taking your calls, so jump into the conversation at (347) 996-3308. If you just want to listen in, here's the link. Be sure to tweet that.

I'll be as fair as I can, but mostly I'm there to represent for men, so ladies, don't hold it against me. I'd love to hear your stories and thoughts on the topic, so post away in the comments or tweet me @k_dot_re.

Have a great week.

photo courtesy Lucell Trammer