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Tips for Getting Out of Debt

Posted On: 2006-06-26
Length: 9:06

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Are you in debt? How can you get your head above water and potentially reach solid financial footing? In this Fidelity Personal Finance podcast, we've got questions, and Carmen Wong Ulrich has some answers. She's the author of the fiscal self-help book, Generation Debt, Take Control of Your Money, a How-To Guide.

For young adults, the first foray into financial independence can feel more like prison. Saddled with an average of 18 1/2 thousand dollars in student loans, and $1800 in credit card debt, those early in their careers can find themselves drowning in debt. Why is this happening? More importantly, how can you get your head above water and potentially reach solid financial footing? Our first question for Carmen is, why do young adults, ages 18-34 have so much more debt than generations past?

Well, you know, it's a combination of factors. Today, unlike 30 years ago, a college education is pretty much required to land a decent job. And at the same time government grants and funding for college have shrunk considerably. So now, instead of the government covering up to 84% of college costs through Pell grants, the onus to pay for college is much more on the student. And if you add to that the fact that college bills are the fastest growing consumer cost today, you know public college increased by 46% over the past 5 years, it's no wonder that college grads have so much debt. And to make matters worse, it's very easy for college students to take on credit card debt, wherein the past you needed a job and a credit record first. Many students today, they pay for books, computers and living expenses using credit cards, which they have to pay off with these meager starting salaries. So, that's tough to do when you're trying to pay living expenses, buy clothes for work, and acquire all the necessary technology. Computers, cell phone, Internet service to be able to compete in today's workforce.

Well how does someone with limited income unload all that debt?

First, stop charging and next, start tackling your credit card debt. Now that's not to say that you should stop paying your student loans, because that could hurt your credit. But your focus should be on paying down your most expensive debt, and that's typically credit cards, which can charge more than 20% interest, as compared to the average 6% you pay on student loans. And besides, there may be other solutions for your student loans, which we're going to discuss shortly. Pull all your credit card bills together, and put them in the order of highest interest rate, that's APR, not highest balance. Pay as much as you can each month on the highest interest rate balance, while paying the minimums on the other cards. Once you've paid off the most expensive debt, cross it off your list, and move on to the next one. Also, really important. Don't be afraid to call your credit card company and ask for a rate reduction. If you've been a good customer and you've paid all your bills on time, they'll want to work with you to keep your business. Above all, don't ignore phone calls from creditors. As long as you're willing to talk with lenders, you can work out a plan to protect our credit history and scores. Remember, that's your adult report card.

So what happens if you don't pay your student loans?

Even though student loans offer more leeway than credit cards, you can't miss payments without damaging your credit history. These are big loans, owned most often by the government, who will garnish your wages to make you pay your debts.

Can you negotiate...

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