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Need advice on paying down CC debt- 24 y/o

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    Need advice on paying down CC debt- 24 y/o

    Hey all, this is my first post here and I wanted to see what others thought of my financial situation.

    A little background, I am 24 years old, just recently graduated with my M.A. degree (paid for the education with student loans mostly, but that is for a later time). I recently broke up with my long-time girlfriend who I used to live with and moved back in my parents. I've been living with them for the past 6 months and focusing on eliminating my debt that I built up while in school and living beyond my means, with a "I'll just pay it later attitude". I work two jobs, one paying $40k that is per diem that I estimate I'll make around $10k in a year (so total of $50k income - and looking for better!)

    Well now is "later" and looking back, of course I realize that was a bad decision. Coming out of school, I had around $9,000 credit card debt, which now I've cut it down to around $6,500, in 6 months.

    So my ultimate plan is to try to pay off the 6,500 I owe in CC debt while I am living with my parents, and eventually get my own place once I no longer have any CC debt. The one issue I am unsure of is whether I should aim to eliminate all the debt before I move out on my own (which would take around 7 months, and I'd plan to be living on my own by October 1st, 2014) or if I should aim to get my CC balances below 30% of my max limit (which would take around 4 months, plan to be out by July 1) .

    My initial thought was to focus on eliminating the debt completely and ditch credit cards in general. If I were to do this, I'd have to live with my parents for 3 extra months, but I'd be free of credit card debt in general. The only issue with this scenario would be the normal "living at home" issues that arise, but owing $0 to creditors makes it all worth it.

    On the other hand, I remembered the reason I got the credit cards in the first place...to build good credit that would help down the road when financing a house or a car. That was the initial reason, but like many others, I maxed out the credit cards when life issues came up. Being at the max and applying for more cards in a crunch (and even above the max at times) has hurt my credit score significantly. So now that my focus is eliminating my credit card debt, I am wondering if totally eliminating my debt is a smart idea or if it would be more benefical to just lower my debt to 30% of my max and make payments on the cards, but not use them at all.

    In the 30% credit card scenario, I'd be living on my own by the summer, a few months earlier, and I'd be able to focus on building my savings, investing, and budgeting my money without making large $500+ payments to my credit debt every pay period. While doing this, I'd also be improving my credit scores (I suppose). I'd have about $2,700 (which is 30% of my total $9,000 credit limit) to pay off over time.

    So, I am somewhat torn on which is the better idea or strategy of eliminating my credit card debt. No matter what, my goal is to not have any cards maxed out and to eventually be out of credit card debt. On one hand, the idea of having $0 owed to credit card companies sounds great but thinking of moving out on my own in October seems so far and a little demotivating. Also, I am afraid that this strategy will have little-or-no positive effect on my credit score.

    On the other hand, paying off my debt until I only owe less than 30% of my credit card max's has its pros and cons also. The Pros are that I'd be able to live on my own sooner (and have a financial goal that is sooner and also easier to reach) and that this strategy would help my credit score. The Cons would be that I'd still be in credit card debt, just slightly, but I wouldn't be relieved of the debt totally. And in the long run, this strategy will end of costing me a few hundred more $$ in interest.

    This is just something that I've been thinking about recently and struggling to decide which strategy is better. I am more leaning toward the first strategy, and living with my parents while I totally eliminate my debt and then going from there. I just wanted to get some opinions from others, to help me shape my decision.

    As a side note, living with my parents has not been an issue and I do pay them rent, but it is a fraction (probably a 1/3) of what I'd be paying living on my own. I do, however, want to live on my own just for the simple fact of being independent at 24. So I am also weighing my options of whether living on my own is a smart decision at this time when living with my parents hasn't brought on any problems. It has actually brought us closer, but I am sure my parents would prefer me living on my own and visiting compared to living in my old, small, bedroom. This is something that I will figure out on my own, but since it has financial implications, I would like to see what others thought.

    #2
    Originally posted by TruC View Post
    In the 30% credit card scenario, I'd be living on my own by the summer, a few months earlier, and I'd be able to focus on building my savings, investing, and budgeting my money without making large $500+ payments to my credit debt every pay period. While doing this, I'd also be improving my credit scores (I suppose). I'd have about $2,700 (which is 30% of my total $9,000 credit limit) to pay off over time.
    I do not agree with the 30% scenario. If you still have credit card debt, you're not at the point of being able to focus on investing and saving.

    I would save 1K in an emergency fund right away, if you haven't already. I would then get rid of the credit card debt. Three months really isn't that long. At the minimum, I would pay the credit cards prior to moving.

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      #3
      Originally posted by TruC View Post
      As a side note, living with my parents has not been an issue and I do pay them rent, but it is a fraction (probably a 1/3) of what I'd be paying living on my own. I do, however, want to live on my own just for the simple fact of being independent at 24. So I am also weighing my options of whether living on my own is a smart decision at this time when living with my parents hasn't brought on any problems. It has actually brought us closer, but I am sure my parents would prefer me living on my own and visiting compared to living in my old, small, bedroom. This is something that I will figure out on my own, but since it has financial implications, I would like to see what others thought.
      Welcome!

      Your statement above answers it for me - I have had to move back in with my parents as an adult, and while it's of course not ideal, it's also something that is a fantastic opportunity for you financially. Especially when the time difference you're talking is so minimal. I have always been lucky in that I actually LIKE my parents, and the house is set up in such a way that my bedroom wasn't next to theirs. I actually have lived at home for several years as an adult and the only thing that really suffered was my romantic life

      I would say stay at home for the extra 3 months. Pay everything off. If you can deal with it for a little longer, boost your savings. You'll have a much easier time when you DO move back out if you start off with a cushion, and then the chances of slipping back into old habits of putting things on the credit card will be much smaller.

      Comment


        #4
        I would absolutely pay off the credit card. Make sure you have like $1,000 or so in savings for emergencies, then go banans and pay off that credit card debt! Even if you live with your parents for three months longer, that is a small price to pay to get out of debt!

        You have a decent income. $50,000 per year for a 24 year old is nothing to scoff at. Use your income, and your lower expenses, to your advantage.

        I love the fact that you are thinking ahead about moving out and being on your own. Nothing beats flapping your wings and being out on your own!

        As far as your credit goes...

        You do NOT need a good credit score in order to get a mortgage. You can still get a mortgage if you have "no credit score available." So just be aware of that.

        If you want to improve your credit score, then here are the five factors to be aware of:

        Total Debt- do not use more than 30% of available credit. If you have a credit card with a $1,000 limit, do not borrow more than $300 on it. Also, don't carry a balance. Once you pay off your credit card debt, stay out of debt. Pay off any balances within the grace period to avoid interest.

        Payment History- pay on time! Enough said.

        Type of Credit- who cares. Do not take on loans JUST to improve your credit score.

        Length of Credit History- do the right things over the course of time.

        New Credit- do not open new accounts frequently.

        If you want to improve your credit score, then pay off your debt, stay out of debt, and pay off any credit card balances at the end of each month. There is no reason to stay in debt just to improve your credit score.

        Also, paying interest DOES NOT improve your credit score. I wrote a blog post not long ago which illustrated this whole situation. Do not be fooled- you do not have to pay interest on a credit card (or any other debt) to improve your credit score.

        A final note: your student loans are NOT for a later time. That is the type of thinking that gets people into trouble with student loans. Based on your post, you have some student loan debt and you need to focus on that as well! I do not know if you have it in deferral or something, but no matter what, student loans need to be focused on! They do not go away unless you make them go away. And saying "but that is for a later time" is very dangerous. So please understand that you do need to address your student loan problem!
        Check out my new website at www.payczech.com !

        Comment


          #5
          Paying off your credit cards will not hurt your credit score. I have over 2 dozen credit cards, but at any given time most of them are at a zero balance, and I routinely pay off my owed balances monthly. But that still leaves a record of timely payments, which makes for a strong credit score.

          Having credit cards is not the problem. Misusing them is the problem.
          Retired To Win
          I blog weekly on frugal living, personal finance & earlier retirement at:
          retiredtowin.com
          making the most of my time and my money

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