Recently, I received an email from a reader of Money360 who laid out an interesting yet familiar story:
My girlfriend is a junior in college and she’s managed to dig herself into about $2500 worth of high-interest debt by accumulating credit cards from retail stores (20-24% interest rates). She always makes her minimum payment on time, but she can’t seem to knock down the balance. She works part time during the school year, but doesn’t make enough to actually gain any ground against her debts. Over the summer she will be working full time and has set a goal for herself of paying down at least 80% of the balances. She is diligently cutting up each card as she pays off the balance.
She has gone to her parents for help, but for whatever reason (they are trying to teach a lesson; they don’t trust her) they aren’t helping. She asked her parents to co-sign on a low interest rate credit card to use to transfer her balances, but they refused. She tried to get financial aid to help pay for school, but she didn’t qualify because her parents’ income was too high.
Do you know a) if there are any student loans that she can apply for that don’t require her parents’ signature or depend on their income, and b) if she can qualify for a student loan, can it be used to pay off credit card debt?
Alternately, there are some student-targeted credit cards (Citi has some, for example) that offer 6-month 0% on balance transfers and advances. 6 months, unfortunately, won’t give her enough time over the summer to get the balance paid down. Could this approach turn out to get her in more trouble if she can’t pay off the card before the promotional period expires?
Or, is there another way to help her consolidate debt and lower her interest rates?
So how do we help our friend out here?
First of all, loans aren’t going to help too much in this situation. Assuming that she is still being claimed as a dependent by her parents, she will have a very hard time getting any need-based scholarships. As for loans, there are some pretty strict limitations on those and it’s also a way just to shuffle around debt and postpone it. It’s more worthwhile to learn how to combat debt head on now than to just move debt to the future and wish you hadn’t in a few years.
So let’s look at some other tactics. Here are five things she should do – the first two directly address the credit cards, the other three are more general tips for getting out of the situation more quickly and being able to start saving some money instead of digging out of debt:
1. If she’s been able to keep her minimum payments up to date, she should call the credit card companies and explain her situation, then request an interest rate reduction. If they refuse, mention the Citi cards with a 0% balance transfer, and if that doesn’t work, ask to speak to a supervisor. Almost always, that plan will bring about a reduction in the interest rate, which will help as she pays them off.
2. If her credit has been damaged already by poor payment, Consumer Credit Counseling Services (ONLY them, they’re reputable, most other consumer credit services aren’t) in your area. They can negotiate with the credit companies on your behalf. This will likely cause another ding on her credit report (usually, depending on the credit card company), but if the credit is already damaged, you’re better off showing that you’re working to change things than worrying about another potential ding. If you’re still in college, major loans are still several years off, so the damage should be washed away by the time you seek a home loan.
3. Look for extra moneymaking opportunities. Do you live in an area where you can redeem soda bottles and cans for a nickel? Burn an evening a week on a “date” where you walk around campus, fill up a bag of them, and turn them in for several dollars. Do this for a year and you’ve got hundreds of dollars. Donate plasma. Sell some tutoring in whatever subjects you’re best at.
4. Live frugally. I don’t mean be cheap, I mean take advantage of the fact that you are college students, which to many people equates to poor. Hit lots of free dinners at churches in your area and talk to people there; you’d be SHOCKED how often you can come up with someone who has something that might help you at a free church dinner. I got a great job at one, got an offer of free housing at another, and met someone who became a lifelong friend at another one.
5. Sell stuff on eBay. I don’t know a college student that doesn’t have at least a few frivolous things that can be sold on eBay. I sold my Nintendo 64 back in the day, along with most of my presidential campaign button collection, and that paid off some things for me back then. EBay some stuff that you may or may not miss; if you do miss it, buy it back on eBay when you’re more financially stable.
Given that this is a relatively small amount of debt, this situation can actually be a good learning experience in terms of discovering how to effectively manage credit and also the challenges and rewards of battling out of debt. Good luck!