Lower Your Debt Right Now

Say goodbye to homework and exams and hello to the task of paying off debt. The average college graduate who borrowed for school starts out in the world under a staggering load, with nearly $20,000 in education loans and another $2,000 in credit card debt. Yet average starting salaries will begin at just $30,000 for this year's grads depending on their field of study, according to the National Association of Colleges and Employers.

Those figures may seem downright discouraging. But if the reality of your debt load is starting to sink in, don't despair. Although paying off the whole of your debt will take dedication and time, we've come up with seven small tricks you can use today to save hundreds, or even thousands, of dollars on your credit cards and student loans and pay them off faster -- even when you're short on cash. A few minutes may be all it takes to set yourself up on a smoother path toward financial freedom.

1. Consolidate your student loans now -- and I do mean right now. The interest rate on outstanding Stafford loans will rise almost two percentage points on July 1 -- to 6.54% if you're still in school or in the six-month grace period after graduation, and to 7.14% if you've already started repaying. That gives you just two days to lock in at today's lower rate. Your window of opportunity will slam shut at midnight on June 30. Consolidating your federal loans is like refinancing your debt into a single loan at a fixed rate. (You can consolidate private loans separately from your federal loans, but private-loan consolidation is usually at a variable rate determined by the lender.) Locking in at pre-July rates will net you a lower monthly payment and save you about $2,200 on a $20,000 loan over ten years.

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2. Shop around for the best student loan perks. Thanks to recent legislation, you are no longer required to consolidate with the lender who holds your student loans. You now can shop around for the one that offers the best terms that will help you trim your debt even further. For example, look for a lender that offers a discount on your interest rate if you opt to have your payments electronically debited from your checking or savings account each month and another rate reduction for making on-time payments over a 24- or 36-month period. Such perks can typically shave between 1 and 3 percentage points off your rate, saving you hundreds of dollars over the life of your loan. You can compare deals at www.ConsolidationComparison.com.

3. Ask your credit card company to lower your rate. Sometimes a solution really is this simple. A five-minute call to your lender could save you hundreds of dollars on interest charges. In 2002, the U.S. Public Interest Research Group asked 50 consumers of varying credit backgrounds to call their lenders and ask for lower rates. The strategy worked for more than half of the group, with the average rate reduction going from 16% to 10.5%. That big of a rate chop on a $2,000 balance would save you nearly $200 over 2frac12; years. Credit card companies spend hundreds of dollars trying to acquire new customers, so they may be willing to negotiate to keep your business, says Howard Dvorkin, founder of Consolidated Credit Counseling Services. It certainly doesn't hurt to ask.

4. Shop for a lower-rate credit card and transfer your balance. If your credit card company won't lower your rate when you ask -- or it won't lower it far enough -- shop around for a better deal. Once you have been making regular payments on your college-issue card for a while, you might have built enough of a credit history to get a lower-rate card elsewhere. Watch out for introductory offers, though. You don't want to get reeled in with the promise of a 5% rate only to find that it'll shoot up to 18% after three or six months. Unless you're confident you can pay off your entire balance within the introductory time frame, you'd probably be better off with a card charging a fixed rate.

But what about switching to another card at the end of an introductory offer? You should probably avoid card-hopping. Chasing low introductory offers can hurt your credit score because lenders aren't interested in customers who jump ship. And if you make one wrong move -- say your payment gets lost in the mail, for example -- your rate could jump up to 20%, says Dvorkin.

5. Scrap the monthly fee. Your low-rate card may not be the deal you think it is if you're paying an annual fee. For example, if you pay $40 each month toward a $1,000 balance on a card with a 12% interest rate and a $50 annual fee, that's equivalent to a no-fee card with an 18.4% interest rate. Use our calculator to find out whether a low rate is worth the annual fee. If it's not, shop for a no-fee card at a lower rate than your break-even point.

6. Trim the fat from your spending. Spending just a few minutes with your budget could net you big savings. Look for areas where you can cut back and then use the money you save to pay extra toward your debt with the highest interest rate. "Everybody has 15% to 20% of fat in their budget," says Dvorkin. For example, forgoing that $4 latte every day would save you about $120 a month. On a $2,000 balance at 18% interest, adding that extra $120 each month to a regular $80 payment would save you $342 in interest -- and you'd completely pay off your debt in only 11 months, instead of nearly three years. Even if you can trim only $1 a day from your spending, putting that extra $30 each month toward your balance would save you $173 in interest, and you'd pay off the card in less than two years. Calculate how much time and money extra payments can save you.

If you predominantly use a debit card (or your credit card) instead of cash, it's easy to see where your money is going. Some banks, such as Wells Fargo, will sort out your spending into different categories -- including transportation, groceries, healthcare and retail -- and present the summary in a free online report. Or, you can analyze your past bank statements yourself by tallying up how much you spent where. If you often use cash, however, you'll need to track your spending with a pencil and paper for a month or two to get a good idea of where your spending leaks are before you can plug them.

7. Stop using your cards. "If you're paying down one credit card and charging up on another, you may as well be a hamster on the wheel going around and around -- you're never going to get off," says Dvorkin, and you won't save any money. Put your credit cards away, and you'll whittle away at your debt faster, as well as spare yourself a future of more debt. But don't close the accounts -- having unused credit available from lenders you've been with a long time can actually raise your credit score. Learn more about how to break your credit card cycle and how to stop living paycheck to paycheck.