How to Manage Multiple Sources of Debt

CreditCard_With_MoneyAs young adults struggle to get out from student loan debt, which averages a whopping $26,000 per student, according to The Project on Student Debt, they’re shying away from taking on other forms of debt.

A recent study released by the Federal Reserve Bank of New York found that college graduates are now less likely to take on a mortgage or even an auto loan by the age of 30 — reversing a historic trend of home ownership.

But what do you do if you are already shelling out monthly student loan payments but also want to buy a house or car? Taking on multiple types of debt is a balancing act and it can be easy to get financially overwhelmed.

The first thing you should do when thinking about taking out another loan is to determine your total monthly payments for current outstanding debt and the amount you’re looking to borrow. Then, figure what percentage of your monthly income would go towards paying off that debt.

“We recommend that no more than 30% of your take-home pay go toward housing costs [like a mortgage, taxes, and insurance] and no more than 20% of your pay go toward servicing other debt [such as a car loan or credit cards],” says Gail Cunningham, vice president of membership and public relations for the non-profit National Foundation for Credit Counseling.

Exceed these percentages, and you could find yourself burdened with a crippling amount of debt. “Make sure that the additional debt is absolutely necessary,” Cunningham stresses.

Before taking out a loan, experts suggest having a repayment plan in place.

Everyone’s pay-back strategy is different, so find one that best fits your financial needs and lifestyle to make the plan sustainable.

Some borrowers find that it’s motivating to pay extra toward the smallest loan in order to quickly eliminate it. For example, if you have a car loan that has an outstanding balance of $5,000, and you also owe $27,500 for a student loan, pay extra each month on the auto loan to rid yourself of it as soon as possible.

But if paying the least amount of interest over time is the most important thing, focus on paying off the loan or credit card with the highest interest rate first while meeting the minimum obligations on the others.

If you already have an auto loan or credit cards, before taking on additional debt, you may want to consider refinancing the loan or getting a lower rate credit card by doing a balance transfer. For example, if you took out an auto loan when rates were higher, refinancing it at a lower rate may make sense depending on the balance and time remaining.

Likewise, you can pay down the principle of a higher rate credit card faster if you transfer the balance to a lower interest rate credit card, provided you continue to make the same monthly payment (and it’s more than the minimum due). As an example, a $200 payment on a card with a $50 monthly minimum will reduce principle for a card with 3% interest faster than one with 15% interest. Just be sure to read the fine print regarding the cost to transfer the balance and when the introductory rate will end.

Did you know First Financial has no balance transfer fees? Transfer your high rate credit card balances over to a First Financial Visa Platinum Credit Card – fee free!* And, if you are looking to refinance your current auto loan – give First Financial a call at 866.750.0100, Option 4 or stop into any branch location to see what you may be able to save on your monthly payments.**

Finally, if you discover yourself getting overwhelmed by the repayment process or find that you can no longer meet your monthly repayment obligations, consider talking with the company or meet with a credit counselor to consolidate debt, reduce interest rates or create a new repayment schedule, or even possibly getting some of your debt forgiven.

For a FREE and anonymous online debt management tool, try Debt in Focus. In just minutes, you will receive a thorough analysis of your financial situation, including powerful tips by leading financial experts to help you control your debt, build a budget, and start living the life you want to live!

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*APR varies from 10.90% to 17.90% when you open your account based on your credit worthiness. This APR is for purchases, balance transfers, and cash advances and will vary with the market based on the Prime Rate. Subject to credit approval. No Annual Fee. Other fees that apply: Cash advance fee of 1% of advance ($5 minimum and $25 maximum), Late Payment Fee of up to $25, Foreign Transaction Fee of 1% plus foreign exchange rate of transaction amount, $5 Card Replacement Fee, and Returned Payment Fee of up to $25. A First Financial membership is required to obtain a VISA Platinum Card and is available to anyone who lives, works, worships, or attends school in Monmouth or Ocean Counties.

**First Financial membership is required for an Auto Loan and it’s available to anyone who lives, works, worships, or attends school in Monmouth or Ocean County. $5 savings account required for membership. Verification of your identity is required. Income verification is required. Subject to credit approval. Credit worthiness determines your APR. Certain restrictions apply. Contact the credit union for details of the offer.

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