On the Today Show yesterday morning, I joined personal finance all-stars Jean Chatzky and David Bach to answer viewers’ financial questions. We have the video below, in case you missed it, as well as a recap of my answer to one young woman who was curious as to whether she should allocate extra money toward her student loans or retirement account.
Marcia from Lexington Park, Md., asks:
I graduated from college in May of 2009 and I have been paying on student loans since December 2009. I recently got a new job that offers a 403(b) enrollment and I want to know if it’s more beneficial to pay more on my monthly student loan payments to decrease my interest paid, or invest that extra money in a 403(b)?
I always like to find hybrid solutions. Fortunately in this case, Marcia can do both—save for retirement and put more money towards her student loans. Here’s how: First, continue to pay the minimum on your student loans so that you don’t fall behind. That’s critical. You don’t want to see your balance or your interest rate balloon because of a delinquency. Next, take some extra money from your new job and automatically invest that in the 403b retirement plan. With all 403b plans, like a 401k, your contributions can help reduce your taxable income. In other words you’ll pay less taxes. You can figure out what that tax savings will roughly be based on your tax rate. For example, if you earn $30,000 a year and invest $3,000 in a 403b, that reduces your taxable income to $27,000. If you’re in the 15% tax bracket, you could save as much as $450 a year in taxes. With that extra savings, you’re ready to pay down your student loan principal.
One question we did not have time for came from Kayla in Lee, Maine. She asks:
I’m 23, I don’t have bad credit, but I have not yet established my credit. I recently was looking to buy a new vehicle and was able to put half of the money down. I gave the car dealer all of my information and at the last minute decided against the new vehicle. Since then I have received about 10 letters from banks declining my loan request (which I did not even want in the first place) some of which have been from the same financial institutes and when I looked into it I was told that the car dealer accidentally must have hit the request loan button more than once? Is this hurting my credit?
I double-checked with our resident credit expert Tom Quinn and it appears you’ve experienced what’s called “shot gunning”—a common practice in auto lending where the car company contacted multiple lenders to see which one would come back with a favorable rate. The fact that you were rejected for credit won’t impact your score. Rejection information is not reported to the credit bureau. But the inquiries posted on your file may have a small impact—but very small. If these inquiries all took place within a 30-day period it will have no impact. If they find additional auto loan inquiries prior to the last 30 days, it will all count as just ONE inquiry, which is less than 5 points off your score.
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