Lauren Davidson is a soon-to-be graduate from the University of Pennsylvania with majors in English and Communications. As she shifts into the “real world” she hopes to start a freelance writing side hustle to help pay down her student loan debt.
Net worth is a concept that many college students don’t often think about. Simply put, net worth is assets – what you own – minus your debt, or what you owe. Usually, students are focused on trying to make their rent or their student loan payments, so the greater concept of net worth gets lost. Because of that, however, many students find themselves engaging in high interest debt, and nothing kills net worth faster.
As The Simple Dollar points out, if you have a credit card with a 5.5% APR, a $1000 balance over the course of the year will cost you $55. That’s not exactly exorbitant – and if you’re paying off your balance every month or every two months, you’ll pay even less than that. Many credit cards for students, however, have much higher rates. Some are as high as 24.74%. That means the same $1000 balance will now cost you well over $200 per year.
That’s not counting the extra fees that often accompany high-interest cards. Some cards could charge you for everything from annual fees to credit limit increases, replacement cards, over-limit fees, and even monthly ‘maintenance fees.’ Those add up. Over the course of a year, you could pay over twice the APR on a $1000 balance – and all of that hard-earned money isn’t going to anything that will benefit you later. It’s just lining the card company’s pockets.
Credit card debt will drain your cash reserves
As those fees add up, they drain your available funds as well, leading to less financial freedom and setting you up for failure. If you are unable to save money for emergencies because of your high-interest debt payments, what happens when your car breaks down and needs repair, or you have a family emergency requiring you to fly home? One of the most important aspects of financial responsibility is having an emergency fund – with high interest debt, the chances that you’ll be able to have emergency money set aside are lessened significantly. That means an emergency could put you into a financial tailspin.
These warnings and ideas are all fine and good, but what if you already have high interest debt? What if you’re already locked into a paycheck-to-paycheck existence because of high rates and constant fees? Thankfully, there are ways to get out from under that debt and put yourself back on track to financial success – and they don’t require that you move back in with Mom and Dad.
Interestingly enough, the first step to getting rid of that high interest debt isn’t paying it off – it’s getting an emergency fund. Even if it means paying the minimum on your debt, or only being able to put $20 aside per week, it’s imperative to get some money set aside for emergencies so that when they happen, you can handle them without your debt payments – or credit score – taking a hit. Even $20 a week adds up, and you’ll have $1000 set aside in less than a year.
How to speed up repayment
Once you have an emergency fund, you can start looking at your debt. In order to get high interest debt paid down faster, you can get creative; transferring the balance to a lower interest credit card is one option. You can also go through your expenditures for a given month and take a hard look at what you’re spending money on. Your daily $5 latte before school or work, for example, adds up to another $100 per month; weekend dinner and drinks could be another $150. Once you’ve had a brutally honest talk with yourself about where your money is going, it’s time to make a plan.
There are a number of debt reduction plan types; they often come with spreadsheets to keep you organized, let you plot your progress, and keep you motivated. These spreadsheets are free, and let you get started making a plan right away.
Whatever plan you choose, it’s going to require some cutting back on expenses. That extra money you saved from skipping your morning latte can be an extra payment on your credit card debt. Learning to cook simple meals at home instead of going out can net you extra cash as well.
Some debts can benefit from a refinance; depending on your credit score, you may be able to get a better interest rate on your car loan or even student loans. Paying the interest on student loans while you’re still in school is another good idea; that keeps the interest from being added to principal – and making you literally pay interest on your interest later.
Whatever plan you choose, stick to it. Use the spreadsheets, and watch your debt disappear as you move toward financial independence!