Drowning in debt? Here's help staying afloat -- April 2002 -- FP Report

April 2002 • Volume 8 • Number 4

Drowning in debt? Here's help staying afloat

BY CINDY McCANSE

Back in your medical school days, you probably had more than a passing acquaintance with peanut butter and jelly, mac and cheese, or whatever your poverty food of choice was. Most likely you worked part time; if you were lucky, it was in a quiet spot where you could study. And splurging meant taking in the occasional Saturday matinee or having a cheap beer at the local tavern.

So it hardly seems fair that despite all your efforts at frugality, you're still looking at a mountain of student debt as you now prepare to enter residency. But take heart! There are lots of ways to chip away at that load -- some of them relatively painless, others a bit more daunting.

Let's start with credit cards.

PLACATING THE PLASTIC GODS

Sure, it seemed like a good idea at the time to take all those credit card companies up on their offers. But now that you've amassed enough of the shiny little jewels to tile your bathroom floor, it might just be time to take a closer look at what they're costing you.

According to James McKenna, M.D., director of the family practice residency at The Medical Center, Beaver Falls, Pa., the average American throws away about $450 on credit card interest annually. McKenna, a perennial presenter on managing money and debt at the National Conference of Family Practice Residents and Medical Students, has several pieces of advice on this score, starting with the obvious: Don't use the darn things! If you do, limit your spending to what you're able to pay off each month.

Realizing that's a pretty tall order, McKenna offers these practical hints to help bring those card balances under control:

"You want to pay off your highest-rate balance first," he says. Switching high-rate card balances to a lower-rate card can help you do that. Scrutinize the offers you get in the mail, McKenna advises. "Every time you get one with a low introductory six-month rate, take it." And at the end of that six-month period, call the company and tell them you plan to switch your balance to another card unless they extend the introductory rate another six months. A lot of times they'll accommodate you, McKenna says.
Make them pay you. Some companies, such as Discover and American Express, give you cash rebates based on a percentage of your purchases.
If you find yourself getting slapped with late fees or finance charges because your card bill falls due before payday, call and ask to have the date switched. And while you're on the phone, it doesn't hurt to ask the card issuer to reverse a late fee; some will swallow the fee rather than lose a good customer.

Check out http://www.bankrate.com for more advice on how to handle credit card debt.

SPEND WISELY AND WELL

Of course, the credit card bill is only one of many you receive each month. But once again, a few common-sense measures can add up to significant savings, says McKenna.

Finance your home, not your car. While the car will lose value over the years, your home will likely increase in value -- or at least hold its own.
Shop around for insurance, and consider combined coverage deals. Don't buy unnecessary coverage. And buy the right types of insurance, such as term life instead of whole or variable life insurance.
There's no reason to crank the heat up to 78 degrees in the winter while setting the thermostat for 70 degrees during the summer, McKenna says. Reverse those two numbers, and you'll save a bundle.
Cut back on the food bills by buying nonperishable items in bulk. You can save up to 40 percent on grocery costs.

Choose your battles wisely, says McKenna. "Don't put your efforts into paying off the wrong thing," he says. "If you're focusing on paying off a student loan with a 5 percent interest rate and you're still using a credit card with an 18 or 20 percent rate, you're not concentrating your efforts in the right place."

LOOK AT LOAN CONSOLIDATION

The Association of American Medical Colleges Educational Debt Management Services program offers lots of information to help guide you to financial health. Visit http://www.aamc.org/stuapps/finaid/debtmgmt/start.htm to review the many options available. One of the resources listed is a comprehensive primer on consolidating your student loans.

Loan consolidation offers many borrowers convenience, increased monthly cash flow and a means of renewing deferments or taking advantage of additional deferments.

Making payments on multiple loans from different loan servicers is simply more of a hassle than making one payment each month, right? And you can often negotiate a lower fixed rate on your entire loan portfolio through loan consolidation, thereby reducing both your monthly payment amount and the overall cost of your loans.

PHYSICIAN, KNOW THYSELF

Most important to bring that debt down, says McKenna, is to live within your means, or even slightly below that level. Sit down and figure out all your income, and then do the same for your expenses. Set short- and long-term financial goals for yourself, and then do what it takes to meet those goals. Don't overspend, but don't put yourself on bread and water, either. The key here is being realistic in your expectations.

"You have to know what your means are and what you can afford," says McKenna.

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