Most college grads these days come out of school with both student loans and credit card debt. Student loans alone average more than $29,000 and as we wrote recently, 70% of those with student loans also have credit card debt. And, depending on your financial circumstances, your credit card debts may have climbed since then. If your debts are taking a too-big bite out of your budget, credit card consolidation may be something to consider. There are a few different ways to deal with your credit card debt more cost-effectively. Here are some considerations.
You can borrow to pay them off
While you shouldn’t take out a student loan to pay down credit cards, there are other types of loans you can get. If your credit is good enough and your credit card balances aren’t outrageous, you may be able to get a signature loan (a loan without collateral). This is what a “credit card consolidation” is, in essence. If not, but you own a home, you may be able to take out a home equity line of credit to pay them off. If your parents or grandparents are financially solid, they may be willing to make you a personal loan. The upshot is, the interest rate on the loan must be lower than your average credit card interest rate and you must be able to pay the loan off rapidly enough to come out better than sticking with the cards.
You can transfer the balances to one higher limit card
If you have a card that offers a lower interest rate than your other cards or can get a new card with a higher line of credit and a lower rate, you can transfer your balances to the lower interest card and come out better financially. But here’s something else to think about. One important component of your credit score is how much of your revolving credit line you’re using. If you cancel your other cards after you transfer the balances over, you’ll be using 100% (or close to) your available balance and your score will drop. But if you leave the cards open after the transfer, you’ll have 50% (or more) of your revolving balance available which is much better for your score.
You can develop an aggressive repayment strategy
One of the most effective ways to unload your credit card debt if you can’t consolidate or transfer your balance (or even after you do) is to adopt the avalanche method. The way you do this is to tackle your credit cards in order of interest rate, highest to lowest, but this requires you to have enough money to pay your monthly credit card payments and have a little more cash to add to it. This can be a pinch, but it’s well worth it. You pay your bills as normal then scrape up as much extra cash as you can each month and pay it on your highest interest card. Your minimum payment will drop as your balance does, but keep paying the higher amount plus an additional. Once the card is paid off, put the money you were paying toward that card toward your next highest interest card until it’s paid off, then do the same to the next until you’ve paid them all off.
Cautionary note no matter what credit card eradication method you choose!
One of the big problems that can crop up once you’ve paid down your credit cards is that you may be tempted to run them up again. This can be especially dangerous if you’ve opted for the balance transfer or consolidation loan option. If you run up your cards again, you’ll have to pay those on top of the larger payment for the credit cards you’ve consolidated. This can be a slippery slope to financial disaster! Once you pay your credit cards down (or off) you need to keep your hands off them. In a perfect financial world, credit cards should not be used to buy things you can’t afford. They should be used for things you must have a credit card to do like reserving a hotel room, paying for stuff online, renting a car, etc. Then when the bill comes in each month, you should pay it in full. Credit card balances shouldn’t be carried over month to month as they are one of the costliest forms of debt.
If you’re dealing with student loans as well as credit cards, sign up for Tuition.io’s free student loan tool to keep track of your federal and private loans in one easy interface. And read our blog often for tips on dealing with your loans and getting the most from your money.