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Big student debt and your credit score

Dear Debt Adviser,
I graduated law school a few months ago and am thinking of taking a public-interest job that only pays $35,000 a year. Although I have no credit card debt and my credit report is otherwise clean, my student loans are about $120,000. Assuming I can handle the payments, will these loans prevent me from getting decent credit cards and car loans? I've been too scared to apply in fear of damaging my credit report with rejections.
Thank you.
-- Charles

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Dear Charles,
Congratulations on graduating law school. You are making an admirable choice to take a public-interest job for less money than you could earn otherwise. I have been working in the nonprofit sector for the last 13 years and have found the trade-off of dollars for ideals to be alternately uplifting and at times frustrating. On balance, though, if you make this choice for the right reasons and with your eyes open, it can be very rewarding. America needs people like you who are willing to put larger interests ahead of their own.

You are right on target to look at the implications of a lower salary and how it will affect your ability to obtain credit with a substantial student loan balance. You also may have already figured this out, but your underlying question of the effect of earning less money will be mirrored in every other aspect of your life. Not only that, but if you have a partner in this great adventure we call "life," this question will concern that person as well.

So, although looking at your credit situation is smart, you may want to start with building a comprehensive spending plan for your $35,000-a-year salary. Put pencil to paper or hands to keyboard and work out how much you will need for housing, transportation, food, entertainment, student loan payments, etc.

Don't forget to fund an emergency account and savings for your long- and short-term goals. Once you have a good feel for how your income and expenses will align, then and only then should you be considering credit cards. A bank card is important for things such as renting a car, reserving a hotel room or shopping online, and with your limited income, you will need to be careful about what and how much you charge.

As you have already stated, the student loan payments will cut into your available funds. If you have not already done so, I would recommend that you shop around for the best consolidation loan you can find at the lowest interest rate and best terms. To guarantee a low, fixed interest rate you may need to decide fairly quickly. A proposal now before Congress seeks to ban fixed-rate interest for federal student loan consolidations in favor of variable rates that change along with the current interest rate.

Now, finally, to the question you asked: With your clean credit rating and gainful employment, it should not be a problem to secure a car loan or a credit card even with a large student loan debt. A potential lender will give more weight to your payment amount and payment history than the total amount of the loan. Try to keep your student loan payment and the car loan payment for which you are applying at 20 percent or less of your income (your debt to income ratio) and you should not have any problems. Credit card issuers are even less stringent than that. The Bankrate article, "The power of credit scores," goes into details of how credit scores are calculated.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

 
-- Posted: Oct. 15, 2004
     

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