Americans owe more than $1.74 trillion in student loan debt, which exceeds the nation’s total credit card debt by about $521 billion. Students, in particular, face an uphill battle when managing finances and navigating overwhelming amounts of debt.
Not only are about 45 million borrowers saddled with student loans but college students are also included in the staggering statistics on credit card debt.
Managing consumer debt as a student is challenging. Not only do most college students need a full-time, sustainable salary, but they generally live a more transient life that often encourages borrowing and putting items on credit to pay them back later.
However, this can put students in a difficult situation as they contend with not only their student loan repayment but also credit cards and other debts that accrue staggering amounts of interest over time.
Credit card consolidation can help students reduce their monthly costs by lowering interest rates. However, if not tackled properly, consolidation loans can exacerbate a precarious financial situation.
That said, it is important to understand both the benefits and the consequences of this approach—especially for those with limited incomes, full schedules, and the inevitability of the federal government demanding student loan repayment.
How It Works
Suppose you are a student interested in consolidating your credit card debt. In that case, you can apply for a new loan from a bank or other financial institution, such as a private lender or debt relief company. Keep in mind that you will need reasonably strong credit to successfully obtain a loan at a reasonable interest rate.
One of the common challenges of being a student is managing limited funds and spending. Credit cards may seem convenient to pay urgent expenses, but managing them wisely is essential. Consolidation might be a very effective strategy to help you get back on track if you have credit card debt. This is an explanation of how it functions:
Consolidation Procedure:
- Looking for a New Loan: Consolidating your credit card debt requires a new loan. A bank, credit union, or private lender may provide this loan. Locating a loan with an interest rate less than your present credit card is crucial. By doing this, you will eventually pay much less in interest, freeing up more money to pay down the actual loan.
- Creditworthiness Is Important: Your ability to obtain a decent consolidation loan at a competitive interest rate is based on your creditworthiness. This is an evaluation of your prior borrowing patterns and loan-repayment capacity. This could be difficult for students, particularly if they still need a solid credit history. A creditworthy co-signer can greatly increase your chances of getting approved and lock in a higher interest rate.
- Pay Off Your Credit Cards: Utilize the money you receive from the consolidation loan to settle the total amount owed on your current credit cards. This simplifies the repayment procedure by only requiring one monthly payment.
- Abstain from Reopening Credit Lines: After paying off your credit card debt, you might find it tempting to close the accounts. But fight the desire! Closing accounts can lower your credit score by lowering your total available credit and raising your debt-to-credit ratio.
Your Options
There are several ways to tackle credit card consolidation, but the two most applicable to students are credit card balance transfers and personal loans.
The enticing benefits of balance transfers: Imagine getting a credit card with a 0% introductory annual percentage rate (APR) that can handle your credit card debt. During this fantastic period, you pay your debt interest-free for a fixed period (usually 12 to 18 months). Recall that this is just a temporary fix. Prioritize paying off your debt as soon as possible to avoid paying excessive interest once the introductory period expires.
The Personal Loan Route: Consider applying for a loan from a nearby credit union or bank. This can be a wise choice if you are eligible for a lower interest rate than what your credit cards offer. Compare rates by shopping around, but keep your attention on the monthly payment. Examine the overall interest you will pay throughout the loan. Longer repayment terms may appear more affordable each month, but compound interest can make them more expensive over time.
The Benefits
Credit card consolidation offers significant advantages, for instance:
- Diminished Interest Rates: Consolidation loans frequently have lower interest rates than most credit cards. Over time, this results in huge savings. You will allocate more of your payment toward paying down the principal amount rather than a sizable portion going toward interest costs. This quickens the repaying of your debt and helps you become debt-free much sooner.
- Strategic Credit Usage: Over time, a consolidation loan might raise your credit score while raising your total credit utilization or how much credit you use relative to your limit. This is because it shows good credit management by paying back a single loan on time and consistently combining several loans.
- Simplified Finances: It might take a lot of work to keep track of several credit card invoices with various minimum payment amounts and due dates. Consolidation simplifies your expenses by combining all your payments into a single, easy-to-manage monthly installment. This eases your tension and facilitates monitoring your debt-free progress.
- Possibility of Higher Credit Limits: A consolidation loan may provide a higher credit limit than your current credit cards, contingent on your creditworthiness. This buffering effect and decreased maintenance of the credit utilization ratio will raise your credit score further.
- Better Budgeting: Including debt repayment in your regular budget is simpler when there is just one fixed monthly payment. This encourages improved money management skills and keeps you moving toward your financial objectives.
The Drawbacks
Nonetheless, there are certain disadvantages to credit card consolidation, all of which you should carefully consider.
- Your low-interest rates may not last. If you transfer your balances, recall that the promotional low-interest rate likely would not last beyond a specific period. You may pay interest if you drag out your payments or miss a few.
- It does not solve the underlying problem. If you have a spending problem, this option would not fix the root issue. If you pursue this approach, ensure you understand how you got into this situation and what you can do to avoid slipping into debt again.
When to Consolidate
The decision to consolidate your credit card debt depends entirely on your financial situation, budget, debt amount, and comfort level with tackling it in this particular way.
It may be advisable first to get a handle on your spending habits before you take this step so that you can start the process with your eyes wide open. By doing so, you can ensure that you are addressing the problem from its roots rather than relying on credit card consolidation as a quick fix. No matter what you ultimately decide, taking stock of your financial situation and committing to healthier spending habits will benefit you in the long term.