|
CAILLE MILLNER
Knight Ridder
If you're in your 20s and deep in debt, consider yourself average.
Numerous studies have shown that more and more
young adults are starting out with huge debts. Undergraduate student
loan debt has shot up 74 percent in the past four years, according
to student loan provider Nellie Mae.
But experts say there are two kinds of debt: bad
debt and better debt. The key is tackling the bad debt first and
having the discipline to avoid more.
These are the better debts: student loans, a mortgage,
and, in some cases, a car loan.
A college degree will allow you to make far more
money, so a student loan is a good investment. The loans typically
have low rates, and the interest can be a tax deduction.
Mortgage interest is also tax deductible, and it's
almost always cheaper in the long run to own than to rent. But,
experts say, this may not be true in high-cost areas, especially
if you might move in less than five years.
Most experts say paying cash for a car is better
than taking out a loan, but in high-cost areas that might be unrealistic.
Instead, consider buying a high-quality but reasonably priced
used car, even if you could afford the monthly payment on a Porsche.
Cars depreciate so quickly that buying a new one is not a good
investment.
Now, the bad debts. All the experts agree: Credit
card debt is the worst.
"The best short-term investment young people
can make is to pay off their credit cards," said Robert Manning,
author of "Credit Card Nation."
"Paying off a credit card with an interest
rate of 18 percent is like getting an 18 percent return on your
investment."
If you don't have savings to put toward credit
card debt, experts suggest this strategy: Consolidate debts onto
the card with the lowest rate. Then pay as much as you can, but
more than the minimum each month.
If you can't consolidate, try calling your credit
card companies to ask for lower interest rates; if you have a
good payment history, and if you say you plan to take your business
elsewhere, they'll probably agree. Then concentrate on paying
off the card with the highest rate first, while continuing to
make minimum payments on the other debts.
When the highest-rate card is paid off, turn to
the card with the second-highest rate. Send the money that you
were using to pay that first debt along with the minimum payment
you were making on the second, and so on, until you're in the
clear.
Once you're done, put the money you were using
for debt reduction toward an emergency fund.
"Build up your emergency cushion so that you
don't reach for a credit card the next time there's an unexpected
expense," said Deborah McNaughton, creator of "The Get
Out Of Debt Kit." "If you've already got those savings,
put that money away for some of your larger goals."
Then, once you are debt-free, stop charging.
"Cut up your credit cards if you have to,"
McNaughton said.
More
Debt News
|
