Welcome to Money Talks, our brand-new, truly helpful, non-boring personal-finance column, in which Harvard-dropout-turned super-successful entrepreneur Alexa von Tobel answers some of your most stressful and specific money Qs.
The founder of LearnVest, a site that teaches women and men how to deal with their finances in a smarter, savvier way, is more than qualified to give you meaningful advice on everything from impossible credit-card debt to managing your 401(k). First up, a recent grad needs real intel on credit lines and interest rates.
And of course, if you've got your own Qs for Alexa, hit us up in the comments.
I am a recent college grad with not a crazy amount of student loans. My biggest concern is a retail credit card with a 25% interest rate — yikes! I do my best to pay double the minimum to make a dent on my debt, but that interest is killer.
My mom has agreed to take care of the debt as long as I pay her the minimum each month and close the card completely. I’m so nervous about closing the account because it’s my highest credit line right now. Will this demolish my credit score? Is it wise to let my mom take the debt and put it on her card with a vastly lower interest rate?
Abigail, Knoxville, TN
First, congrats on graduating and for being committed to getting smart about your finances!
You are most definitely not alone in graduating with credit-card debt — in fact, the average college graduate has $3,000 in credit-card debt plus $29,400 in student loans. And, it sounds like your student loans are probably manageable, which is great.
Generally speaking, student loans usually have much lower interest rates than credit cards, so it’s smart to think about tackling your credit-card debt head-on. Let’s break down what you should know to help make smart decisions:
● Your Credit Score:You are right, closing your highest credit line will likely put a dent in your credit score. Why? It means your overall credit limit will decrease, and in turn, your credit utilization rate (the amount of available credit you’re using) will probably go up. In general, I believe that you should aim to keep your credit utilization rate under 30%, as it’s a big factor in your overall credit score. Plus, if your retail card is also your oldest line of credit, closing it can have an even bigger impact, as credit scores take the length of your credit history into account.
● Paying Off Debt: As an alternative to account termination, consider paying off the balance in full and then putting a single, small, recurring charge on the card to keep it active each month. Your high interest rate may only be a problem if you carry a balance over, month-to-month. If your mom is worried about you accumulating more debt in the future, assure her that after you pay off the current balance in full, you will continue to pay off the card before each statement deadline, whenever possible. If she’s still not satisfied, offer to freeze the credit card — literally! At LearnVest, our Planners often recommend freezing your card in a block of ice to help deter your spending instantly, without sinking your credit score.
● Consider A Balance Transfer: After speaking to hundreds of LearnVest clients about their money, I know that credit-card debt can be incredibly challenging. The stress of this debt is often only more complicated when it comes to transferring debt between family members. I’d first recommend exploring alternative options. It sounds like you have alternate credit lines available — do you have a 0% interest card that you can transfer the balance to? If so, consider a balance transfer between your accounts. But, keep in mind that balance transfers aren’t as simple as freely sending debt to another account. Most banks typically charge a balance-transfer fee, and once your 0% APR period ends, your interest rate will likely become significantly steeper. Consider using this calculator from Bankrate.com to see if, after the fees, a balance transfer truly makes sense. Even if you do have a 0% APR credit card, check when that period expires, and then consider whether you’ll have the balance paid off by then.
● Have The Money Talk: If you’ve gone through alternatives and still feel that transferring the balance to your mom is your best option, then make sure to sit down and have a money talk about the hard-but-necessary what-ifs. Ask her, “What if I lose my job and can no longer cover minimums?” and “Would I pay back the debt, and at what rate?” Because your mom will now become liable for your debt, you’ll probably want to have a conversation to help ensure that you’re both prepared for every possible money scenario. This is a lot to think through, but by considering all of your options, you’ll be able to work on tackling this credit-card debt and get ready to feel amazing about your money. We’re cheering you on!
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal, or tax planning advice. Please consult a financial adviser, attorney, or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, referenced, or linked to in this message are separate and unaffiliated and are not responsible for each other’s products, services, or policies.