8 steps toward recovering from youthful money mistakes
Forget bankruptcy, just right your financial ship
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I am 28. I was uneducated about
credit in my early 20s, and have been paying the consequences. I owe $12,000
on my car loan at 14.45 percent. I owe $7,600 on another vehicle at 9.99 percent.
I have three major credit cards and a few revolving credit lines; all at 25
percent. The sum of the debt on the cards with balances totals $3,150. I also
have $27,000 in student loans. I make less than $30,000. I want to pursue a master's
degree. I am committed to paying my debt on time -- and sometimes paying 2 times the
minimum due or more. I have a subprime score. Many suggest bankruptcy, while
others have suggested consolidation. I'm afraid of both. I prefer to have
credit debt paid off before I return to school. Should someone with the high
interest rates I already have just go ahead and file bankruptcy? Consolidate? Any
other suggestions? -- Ms. Blackstone
Dear Ms. Blackstone,
It drives me
nuts that personal financial education isn't incorporated more robustly into
school curriculum. We have truly failed our students in money matters. It's so
important, too, as it's not like most kids can rely on their parents to guide
them in the right direction -- after all, mom and dad are often iffy on the details, too!
Well, that's the situation, and it
looks like you did make some uninformed -- and not so great -- decisions because of
it. It's up to you to understand the ways of money, and it would have been nice
if the training had happened earlier, but let's get to it now. You're still young and
have a lot of great options for resolution. Here's what I think you should do:
one of your cars. I can't imagine why you really
need two vehicles. Keep the most-reliable car, and when your credit
improves, refinance the rate.
whittling that credit card debt away.
When you get rid of one car payment, you can apply that cash to the
balances you have on the cards. Pay $300 per month and you'll be debt-free
in just one year.
your income. Can you work a second job to
amass some extra cash? Look into all the ways you can earn more, at least
on a temporary basis. When you do, pay even more to the credit cards.
a bit of cash. Yes, even while you are paying
down what you owe, I recommend setting a small amount aside for yourself.
Only concentrating on debt can be so depressing -- regularly adding a
little to a savings account can keep you positive and on track.
the bankruptcy talk. It would
absolutely absurd to declare bankruptcy for such a small debt. Not only
would you be stuck with your student loan balances -- they are almost impossible
to discharge -- but you may not even be allowed to because of the means test you'd have to pass.
your creditors to lower your rates. When
you've made a significant dent in the balances and have set an impeccable
payment history, you are ready to call your credit card companies and ask for a better rate.
off your remaining car loan, then concentrate on the student loan. Even with the refinanced rate you may be able to get on
the car loan, chances are it will still be higher than the student loan.
It makes sound mathematic sense to repay the most expensive debts first,
so when you're done with the credit cards, arrange the remaining debts in
order of cost. You may also choose to consolidate your student loans, but
make sure the rate you get is better than the average of what you have
grad school frugally. I think it
would be best to pay off your car and consumer debt before starting your master's
program, just so you have that off of your plate. Then go easy on
borrowing more for school. You don't have to take out the maximum award. You
clearly now know how stressful it is to graduate with a lot of debt, so
think of the future.
Finally, Ms. Blackstone, get smart
about money today! Budgeting, credit, saving and investing are not topics that
people just naturally know; they must be actively learned. It doesn't matter
what one's profession is or will be, everyone should familiar with financial fundamentals. Check out a personal finance or economics book once a month from
the library. Read what's going on in the world of banking and lending right
here at CreditCards.com. Accurate, easy-to-understand, interesting information
exists for free -- and it doesn't come from people who suggest bankruptcy when,
with some adjustments, you can clearly afford to pay your bills.
See related: Credit card debt or car down payment: What to do?
, Cure your defaulted student loan in a few steps
, Negotiate a better credit card APR
, 14 key considerations during bankruptcy
, 8 things you must know about credit card debt
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: May 26, 2010