Sally Herigstad is a certified public accountant and the author of “Help! I Can’t Pay My Bills: Surviving a Financial Crisis” (St. Martin’s Press, 2006). She writes “To Her Credit,” a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
Dear To Her Credit,
I am asking a question for my daughter. She is 23 years old and has been out of college since May 2011. She has been working since June 2011. She has a car loan, school loans and other debt.
One debt that has her worried is a Visa credit card that has a balance of around $3,000. Her monthly payment is about $100 per month, but she is concerned that she is going to be saddled with this for a lengthy time. Does the amount outstanding hurt her credit score? If she pays the $100 per month, that should help her credit but it is going to take a while, correct? Thank you for your time. — Paula
Your daughter is to be commended for finishing college and getting a job by the time she’s 23. You must be proud of her.
I hope she’s not getting discouraged by her debt load. She’s very young to be strapped with student loan debt, a car loan and consumer debt. When people are in school, it’s so easy to think that after they graduate, they’ll have all kinds of money to pay off those debts. When they finally get that after-tax paycheck and discover how many places it has to go, reality sets in. They may wish they had put off getting a credit card until they had a steady income. They may even wish they had settled for an embarrassingly old car they could have paid for outright.
If your daughter’s credit card balance is $3,000, assuming an interest rate of about 17 percent and a monthly payment of $100, she’ll pay it off in 40 months. During that time, she’ll pay over $900 in interest expense as she pays off the balance. That’s a steep price to pay for the convenience of having a credit card!
However, if your daughter can put just $25 per month more toward her balance — less than $1 per day — she’ll be able to pay off the balance in 30 months and save $241 in interest charges. If she pays $200 per month, she’ll polish it off in just 17 months and save over $500 in interest charges.
It’s easy to try different numbers and see how fast she can get rid of her debt and how much she can save in interest expense. Use CreditCards.com’s balance pay-off calculator with her actual interest rate and balance.
If she doesn’t think she can afford to make higher monthly payments, let me risk treading on some toes and suggest where she might find the money to do so. For one, she can sell her car.
Unless your daughter has an inexpensive car that she expects to have paid off within a year or two, she’s overspending on transportation. I can’t stress it enough: The difference between a comfortable financial life and a perpetually stressed one is often sitting in a person’s driveway. An older car can be a perfectly reliable source of transportation if you buy the right one. (Ask your trusty mechanic for help choosing a make and model.) If she can pay off a car and then start saving for the next one before she needs it, she should be able to stay out of the car payment trap for the rest of her life.
Regarding her credit score, making her $100 payments faithfully will help her score, but no more than paying the balance off quickly and then paying off any new purchases every month would. It’s a common misconception that carrying a credit card balance helps build credit. The best way to build a credit score is to keep credit card balances low, never go over the credit limit and never miss a payment.
Your daughter has already learned to make goals and reach them. Paying off her debt and keeping it paid off should be one of her next major goals. The sooner she can do so, the sooner she’ll have the financial freedom to reach any other goals she chooses to make.
See related: FICO’s 5 factors: The components of a FICO credit score
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