Sunday, December 13, 2009

Credit Card Debt from Your Student Loan Perspective

Not all debts are bad ones. Using a mortgage to buy a home, tackling the rising costs of college with a loan, even borrowing money to buy a car—all are good debts with high return values.

But there are bad debts, too, debts that can limit or even prohibit your cleaning up your student loan debt. Of the bad debts, few are worse than credit card debt.

Simply stated, credit card debt can kill you from a personal finance point of view. Massive credit card debt can choke your ability to deal with all your other financial responsibilities, taking over your life and limiting your ability to grow and prosper.

Sure, eating at a five-star restaurant or buying season tickets to watch the Red Sox are worthwhile pursuits—if you can afford them with what you bring home in your wallet every payday. Using a credit card to finance these endeavors is being a long-term loser, if only because most of the things you buy with credit cards depreciate rather than rise in value. Those high-top Reebok basketball sneakers may look great in the box, but once you slap them on your feet, their value resides only in your mind’s eye, because few others want them anymore. Unlike other depreciable items, like a car that provides vital transportation or a pair of eyeglasses that allows you to see, most things you buy with a credit card don’t offer much to your personal bottom line.

From your student loan perspective, any money that is earmarked toward your credit card debt is money that you can’t use to free yourself from student loan debt. That’s the primary reason why credit card debt is invariably bad debt.

It’s bad from a student loan point of view, as well. In fact, student loan debt and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.

Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn’t, but got them right after they graduated and obtained their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health and made it even harder to address their student loan debts.

According to the college-lending agency Nellie Mae, U.S. college students in 2000 racked up an average credit card balance of $2,748. That’s up from an average $1,879 in 1998, the agency reports.

More disturbingly, Nellie Mae also says that a college student who makes the bare minimum credit card monthly payment (with an 18 percent APR interest rate) would need a whopping 15 years to pay off that entire debt. Worse, the cardholder would have to pay as much in interest alone as he or she would the original $2,748 debt. And that’s operating with the dubious assumption that the cardholder would never use the card again.

As if, right?
Then there’s another study published by New York State’s education agency that reports 78 percent of college students carried at least one credit card while 32 percent carried four cards or more. Furthermore, 10 percent of students shouldered a credit card balance of $7,000. Another 14 percent owed between $3,000 and $7,000.

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