Last week I wrote about how my student loans will be too big of a burden to bear, at least at first. So, all whining aside, what am I going to do about that?
Well, obviously Objective 1 is to get a job and to make money. Those loans are going to come due, and quick! One of them doesn’t even have a grace period – the first bill will be due one month after I’m no longer taking classes, so probably in late March or early April. The next loan has a six month grace period, so I can expect bills for that starting in late August/early September. And the final cherry on my loan pie will start come due starting around the new year.
Joy.
But, as I said, work may not be enough. I make enough from my little "side hustles" that I can cover Loan #1 when it starts billing. And I’m really hoping I’ll have a job that can cover Loan #2 by August. But with rent and gas and other bills, it’s Loan #3 that will start to give me a hardship.
Is it ok to… start relying on my credit cards at that point?
Whoa, whoa, whoa, calm down and stop screaming! I know, that sounds bad. I was in credit card debt once before, and the prospect of getting back into it doesn’t really excite me. But it might be necessary, if I don’t make much (a huge possibility) and my Getting Established fund and Emergency Fund run out.
Suze’s Rules
Suze Orman actually gave me the idea for using my credit cards, in The Money Book for the Young, Fabulous, & Broke. She has some rules, though, concerning this action:
- A credit card can be used to help you make ends meet, but you’ve got to cut everything down to bare bones, first. It’s not for "blowout vacations, a closetful of expensive clothes, and going out four times a week."
- Keep monthly charges at or below 1% of your annual gross income. For example, if you make $30,000, charge no more than $300 per month.
- She doesn’t say it, but she says it elsewhere in the book: keep paying the minimums, don’t fall behind!
- Reexamine your situation every six months or so – decide if you can continue to charge for another six months, or if it’s time to rethink your career path.
My Rules
I have a few restrictions I have to impose as well, if I get to this point. I’m still not sure it will happen, but it’s helpful for me to make rules now.
- Keep the debt at a reasonable ratio compared to total credit lines. Between my two cards, I current have $7,500 in credit. When the balance between them equals $2,250, it will start to adversely affect my credit. $3750, or half of my available credit, is the upper limit.
- Use the lower-rate card. This seems like a no-brainer, but I might be tempted to put things on my Amazon card, which gives me points toward Amazon.com gift certificates. That’s a big no-no: the higher APR on that card (12.24% vs. 9.24% on my Bank of America card) cancels out the rewards I would earn. Unless my rates drastically change, the Amazon card is only for purchases that I pay off every month.
- Pay twice the minimum payment. If I can’t afford to do that, it’s a big signal that I’ve charged too much.
The idea of this whole thing is simply to bridge the gap before my income rises – to make ends meet while I do internships or entry-level jobs. I’m hoping it never gets to this… but I feel better going into it with a set of guidelines, first.
I would explore options such as spreading out the payment period because of low income or even forbearance before going to credit cards. I know Suze Orman is respected, but I found some very dubious advice in MBFYFB
I would look at a personal loan before a credit card. They’re generally lower rates. But yes, go with the income dependent or graduated repayment plans. That’s what they’re there for. Personally, I’d also be getting a part time job on top of the internship/entry level position until I could pay things down enough to live below my means. Living on credit is always a last resort in my book.
yes, I agree, using them to bridge the gap when you are starting out makes sense. I did the same thing. After a couple years out of college I stopped doing that (and in general, I think that is wise) but fight when you start out I think it is fine as long as you have the ability to be an adult. You need to use it within reason for small amounts of money.
Credit cards are meant for quick check out and convenience. If you don’t have the cash to back up what you’re buying than don’t buy it. If you don’t have the cash save it build up a nest egg then use the credit card according to what you have in the bank. If something goes awry then use the money in the bank as a back up.
@Vic – what you’ve said about credit cards makes for a good heuristic, but I’m talking about a very specific situation here: is it ok to use credit cards when you’re just starting out, doing internships that pay for only your housing, to bridge the gap? While I generally agree with you, I’m talking about using credit cards as leverage to start a life right after college – to buy groceries and pay for health insurance. I think it can work, if you set very clear boundaries.
@Stephanie – Starting my life on credit is not my idea of good tactics. I can only speak for myself but the thought of using credit cards to leverage myself sounds awful and depressing to me. If for example you use CC to leverage a business start-up with the hopes of getting money back then I would agree but using a CC for groceries is way out of line. I pay my CC debt off in full at the end of every month. So if you can’t pay it off every month then you have to cancel your phone and cable, buy a smaller car, don’t go out to eat, brown bag your lunch do whatever you can to trim the fat. Eventually you will be far better off then those living on credit. Matter of fact I’ve never purchased a brand new car but I do own my own home and all of my CC’s are platinum and my credit is beyond excellent. Just my 1/2 cent. (inflation)
@Vic – I enjoy the inflation joke! 🙂
I am talking about cutting it down to bare bones. Right now, I’m paying off my credit card monthly. I drive a 1996 Oldsmobile, with no payments left on it, and have no intention of getting a new car until it dies (and even then, it won’t be a “new” car). I don’t plan to have phone other than my cell phone (necessary in my line of work and currently still paid for by my parents, and when I upgrade I always get the free phone), and don’t intend to sign up for cable. I will have a roommate, I won’t be trying to get my own place. The only “indulgence” I can think of is that I’ll be getting high-speed internet, but I need that for my side hustles anyway. The other thing I refuse to cut out is basic medical insurance – I think people my age (20s) cut that out as a way to save money, and it’s insane. I’ll at least need major-medical, in case I get hit by a car or come down with a serious illness.
That’s what I mean by bare-bones, and I’m talking about using credit cards if I still can’t even afford that. Is that depressing? Yes, absolutely. Is it a good long term plan? No, of course not. But might it sustain me long enough to get through an internship or a year of entry level work? Yes, it would.
I will look into alternatives (personal loans and the like) – this isn’t something I plan to jump into. But I’m looking for ways to get myself started in the world.
Before anyone asks if living at home with my parents is an option – it might be. That’s my current story, I don’t know how long it will continue. It depends on whether or not I can get a job/internship in my home city.
I think the best alternative might be requesting some sort of deferment or alternate payment plan on your student loans. Or consolidate once all the loans have kicked in. I’m going to assume that the student loan rates are lower than any credit card.
Get yourself set up with the lowest minimum payment you can. Then once you have your budget figured out, pay the maximum out of pocket you can towards the loans.
Anyway, hopefully everything falls into place, and none of these ideas are even needed!
I don’t think Vic is reading what you’re writing. Your life is already “starting out on credit” — and you aren’t starting up a new adventure by letting Visa pick up the tab a little bit, you’re using it to meet a bare minimum loan repayment that you otherwise couldn’t meet.
I don’t like when people give advice that starts with, “You should stop buying lattes and exchange your brand new Hummer for something older and cheaper, no cable, and quit dining at expensive restaurants every night! Problem solved, yo!” when the question covered the fact that none of those things are being bought or will be bought, and despite living cheap/frugally/whatevs, ends still can’t be met.
I don’t know, by the way, if it’s a good idea or not. I think it stinks, but when there’s no other option, what are you gonna do, really?
I’m starting college (I transferred from a 2-yr where I paid everything in cash since it was pretty cheap) and I got my “financial aid” package, which consists of them saying, “Hey! Take out a $6K loan! Awesome! And do that every semester for forever! Also, you’re planning to do medschool, right? Well, ha, good luck with that, kiddo. And next year, your FAFSA’s gonna totally hate you because you worked fulltime this year, so it looks like you’ll have tons of money to spread around! Yay! Education!” And I just think the whole thing sucks. I hate debt and credit cards because I got sucked into it right when I turned 18 and I’m finishing up (finally!) with my last credit card (I’ve paid for everything six times by now, I’m sure) and it just LOOMS. Like…it’s the monster under the bed or something. And so I’m really disappointed at the prospect of gathering up some more debt, even if it’s so-called “good debt”.
@SP – My loans are already on the longest-term, lowest starting payment plan (the graduated plan – in fact, it’s an “old” graduated plan that they don’t offer anymore, I’m grandfathered in because I chose that plan when I dropped out two years ago). Consolidation, as I discussed with some of the commenters on the student loan post, might help, but it would also make my loans due sooner, giving me less time to build up income.
@brista – I hear you! You and I have very similar situations, in a lot of ways. The best thing I can tell you is to stay on top of everything (the more you know, the better you can prepare), and apply for scholarships like crazy while you’re in school. Oh, and read my College Money Tips series on Fridays 😉
Not to rub it in, but for all the other college students out there, this is why I worked jobs and did an internship when I was still in school. I was able to get hired for decent pay right off the bat. Obviously, degree will play a roll, but the more experience you get in college, the better.
@Slinky – I heartily agree – although that requires having an astute awareness of your situation. Many students can’t focus on schoolwork and work-work at the same time – their grades plummet if they try to work. This is why it’s important to know whether you need the money or not – and if you do and can’t work, you need to transfer to a cheaper school or work something else out.
I’ve been working nearly the whole time in college – I’ve even worked a job in my field (almost an “internship” – more like a trial by fire!), but the problem with my line of work is that it’s unionized – you have to get enough hours in internships or base-level jobs before you can get into the union and get “real” jobs.
On a lighter note, you are to be commended on staying in college. Dont forget most parents prefer kids stay in college. The fact that you have voiced your needs is a mental image of what you must do, and how to avoid using plastic. Take it one day at a time, it will work out!
Ah….pesky unions. 🙂 Well that sucks then. Not much you can do about it except grab a part time job if you can.
Paying a much lower consolidated amount earlier, as opposed to being sandwiched into three sperate payments with their individual interest rates, sounds like a good plan. You might have to start paying now, but you’re already doing that with the first loan. At a consolidated rate, you might be paying a bit more, but if you have the option of income contingent payments when you consolidate, go for it. You would basically be trading the 18-20% interest on three seperate loans for 5-7% on one big loan. Also, if you’re lifestyle becomes better able to support it, you can switch to a different payment plan later. If things are still tight, and you can’t pay the loan within 25 years, it gets written off and you won’t have to pay back the rest.
@Maveth – my consolidated amount won’t save me that much. My interest rate now is something like 5% – you average the rates on the three loans, not add them. Some of my loans are at 3%, some at 6% and the rest at 6.8%. That’s the advantage of federal loans. I’ll look into consolidating them, but I think for this year, it will be better for me to pay them piece meal, and only have $110 payments to start with, rather than sign up for $300 payments right away to save a few percent off the interest rate.
Slinky – it’s all well and good when you live in a large area with plenty of part time jobs, but I’ve been unemployed for nearly 4 months because no one in my tiny town is hiring, not even Taco Bell or McDonalds. Working while in college is not always an option.
OK call me dumb but for example let’s say you have $10,000.00 in debt. At 18% that’s $1,800.00 per year I think. $1,800.00 X 25 years = $45,000.00 Yeah no problem you’ve paid us more than four times what you owe us we’ll let you go now. Absurd. I don’t know how the interest works it might be per month but that would be really evil. Call the number on the back of your CC and ask them how the interest works. Better yet ask them to lower your interest immediately.
@Vic – As I said in the entry, the interest rate is 9.24%, not 18. Also, the idea is not to let it sit for 40 years, but to pay it off after one or two. Also, your math is a little wrong, so it wouldn’t be $1,800 x 25 year, it would actually be compounded over that time – the interest earning interest itself, so it would be a lot more. Actually, over 25 years, $10,000 at 18% interest would turn into $626,686.27 (if you didn’t make any payments on it)! That’s why credit cards can be very dangerous, since they can sometimes have interest rates that high. You have to know what you’re doing when you use them.
@Maveth – I disagree. Unless you are working to graduate early by taking summer courses, you still have the summer free. You could always migrate to the next city over and find a summer internship, which would be better than a regular part time job anyway. For that matter, if you’re simply looking for the experience, it may be possible to talk someone into an unpaid internship, depending on major.
@Slinky – things are not always that simple. From my own experience: the reason I didn’t start working until the summer after my freshman year was that I didn’t have a car. No car meant no way to get to jobs, no jobs meant no money for a car. When your family isn’t even in the financial situation to help you get a junker, it can be very difficult to get started.
@Stephanie – I didn’t have a car until half way through college. I worked a job 45 minutes away by working at the same place and working the same hours as a friend who did have a car. I took two hour bus rides to work a job across town. That was actually great for getting reading assignments done. I finally found a job two blocks from my apartment and worked there for the next couple years.
My family wasn’t in a situation to help either. I didn’t have a car until I was two years or so into school when my brother bought a new used car and gave me his 14 year old 200,000+ mile junker of a car. I only got that car because it was only worth a couple hundred dollars simply because it ran and HE owed ME money. I had bought his books for him a couple times when he was in school. He got the car because the dealers wouldn’t take it for a trade in when my parent’s bought a new used car. Funny, they said the thing was worthless! (Not to me!)
Things are never simple, but if you really want to or you really need to, you find a way to make it work. I did whatever it took because that was the only way I’d be able to put myself through school. I hated every minute of college, but I made it through.
@Slinky – definitely, finding a way to make it work is the best thing you can do, and I’m glad you found a way in your own situation! The best that any of us can do is make ourselves ready to jump at opportunities when they come our way – no matter how small the opportunity may be. My first car was very similar to your first car – one foot in the junkyard, it leaked gas and was rusting all over, but it got me to my first job every day.
It still seems to me, though, that the smaller your town, the harder it is to get on your own feet. No public transportation, fewer jobs (especially part time ones or ones that are hiring), and if you live out on the outskirts, miles between you and any place of business. I’m not sure what the solution is, except to save every penny that comes into your hands, and make sure that everyone you know knows that you’re looking for work and transportation. People can’t help you if they don’t know you need it.
@Stephanie –
I’m one of those people that believe there is always SOMETHING you can do to improve your situation. I also believe that nothing changes unless you change it. People may not want to do what it takes to change things, but the option is there.
My fiance came from a small town like you describe in a very depressed area. Nearly everyone he went to school with has moved away. He works IT now, another is a legal aide for a Judge, another is a police detective.
Hi there – Just wanted to say that I pulled off the CC gap bridge in 2004-05. Have you seen the film “Bridge Over the River Kwai”? I haven’t, but I’ve seen a picture of the bridge… it’s a rickety bridge. That’s a good metaphor.
I finished college by living off credit cards (majored in Business). Perhaps a sign of the times, my annual interest expense was only a few hundred even though my revolving balances topped out at about $15k. I opened a new account every few months for the balance transfer or 0% rate, and shuffled the balances pretty well.
Got my first job a few months after college ($14/hr) and luckily was able to parlay that into a better paying one after six months. Then, paid all cards off over the 2nd year after graduating.
The biggest caveat is that once you’re rolling the cards, your “life” decisions become “financial”; i.e. you might want to be choosing your career based on the people you work with and the contribution you can make to society, but you can’t when you’re strapped for cash. Meanwhile, I’ve paid my cards off, but I still have a sort of financial phobia disorder which causes me to save money like a squirrel preparing for winter. This is both good and bad.
What are your other options? At the time, mine included living with parents, begging, long-term camping, renting a trailer, etcetera. So, given the options I had available, I have no regrets.
AH no! You can forbear (not defer) your loans! If you don’t have access the them thorugh the DOE website thats your first step. First consolate them. Then apply for financial hardship forbearance. It is not the same as deferrment because interest accrues BUT the interest on a student loan is nothing compared to a credit card.
Back on the original topic, just in case anyone is curious: The average interest rate of a personal loan from a bank? 13.02%. Higher than my higher-rate credit card. The only advantage there is that on a personal loan, that rate is locked, whereas credit card interest rates are variable. So a personal loan is a wash as far as I’m concerned – not better or worse than a credit card… just harder to get!
The fact that you are writing about this alone is a sign that you are on the right track. Most people would spend without thinking twice and use a credit card as a backup when cash is low. Learning to live within one’s means is a great thing, makes you feel empowered. Once you’ve done this, as it sounds you already have, then making a decision to use credit responsibly is OK.
Interesting thoughts. It sounds as if you’ve got a pretty good handle on your plans, as well as having thoroughly considered all the possibilities available to you, at least from your comments.
My thoughts: it sounds as if, short of getting some windfall before you get out into the workforce, you’ll probably best using your credit cards to bridge the gap. It’s not so much credit cards that are bad, in and of themselves; it’s the unmonitored and uncontrolled use of credit cards that gets people into trouble. Given all your effort on this blog, I have no doubts you’ll be able to stay on top of things.