In this, the second installment of When to spend, when to save..., WISER tackles the topic of debt. As a recent post pointed out, debt (especially the credit card variety) is a huge problem that most people would rather not discuss. But there are ways to deal with debt! Deciding on a strategy to pay off your different kinds of debt and get you out of the red as soon as possible should be one of your top priorities. Pay off credit card and student loan debt ASAP so that you can earn interest, not pay it!
Growth of credit card and student loan debt among young people has ballooned in recent years as tuition prices have gone up at the same time that credit cards were aggressively marketed to students and young adults. Two thirds of college students now graduate with loan debt – the average amount owed upon graduation is nearly $20,000.
What can you do? If you’ve already accrued substantial credit card and/or student loan debt in your early 20s, don’t freak out – but do get down to business figuring out a financial plan to pay off those debts.
- Start by using WISER’s resources to manage your spending (see Keep Track of Your Spending) and start a budget for yourself (see How Do I Start Saving).
- After you have a budget, devote as much of your monthly earnings as you can to paying off high interest credit card balances and private student loans first. Federal student loans generally have lower interest rates so you can afford to pay the minimum on them each month while you concentrate on eliminating high-interest sources of debt all together.
- When deciding how much money to devote to paying off debt each month, remember that compound interest means the sooner you pay it off, the less you’ll have to pay overall. One of the biggest mistakes you can make is only paying the minimum monthly charge on a credit card balance -- this will end up drawing out the debt for years and costing you many times the original charges in interest! For more information on managing credit card debt successfully see WISER’s Fact Sheets on Credit Card Debit for College Students and Credit Card Basics.