Not All Debt is Created Equal: Help A Reader
Debt can be crippling, painful, and downright scary to have. Everyday of the 29 months I worked to pay off my debt after college I felt like I had a huge weight on my shoulders. After I paid off my student and car loans I was so glad to be free! Now that I again have debt and share the responsibility of my wife’s student loans, they are an ever-present grey cloud above our heads. That being said, we both know that it could be a lot worse.
We could have graduated college with much more debt. I could have accumulated student loans while getting my MBA instead of paying it off as I went. I could have delayed paying off my loans and lived a much more luxurious lifestyle for a few years. We could have racked up thousands of dollars in high interest credit card debt instead of staying frugal. We could have bought a house and be upside down in our mortgage. Our wedding could have put us deep in debt. The list goes on and on.
While we consider ourselves to be very fortunate that we have both been raised to be relatively frugal, I know there are others that struggle to make ends meet even when they are trying really hard to do so.
Help a Reader
I recently got a question from a friend and reader of Pocket Changed about taking out additional student loans to pay off some credit card debt. While at first I was a bit surprised at the approach (I would fear that credit card debt could easily just accumulate again), the more I thought about it, the more sense it started to make.
If her credit card debt is $5,000 and the interest rate is 16.9%, she is paying $70.83 in interest each month to start. It would take her 271 months (22.5 years!) of paying the minimum to pay it off and in that time she would pay $6,524.21 in interest.
If she instead takes out a student loan at 6% and slowly pays off the credit card amount, the interest would be reduced to $25.00 per month to start. It would then take 242 months of paying the minimum and $2,219.46 in additional interest to pay it off.
I know which option I would rather choose. With this tactic I have a few caveats though.
- I would highly recommend that the credit card not be used again until the amount you transferred into a loan is fully paid off. You have to turn off the debt faucet. - Pay more than the minimums whenever possible. EVERY extra payment helps in the long term to reduce the amount of interest you would pay. Use a “true cost of paying the minimums” debt calculator to see the difference.
So, what would you do in this situation? Would you take out more loans at a lower interest rate to pay off a credit card balance?