You should pay off a credit card first, in most cases. Credit card debt tends to be far more expensive than student loan debt. Federal student loan APRs range from around 5% to 7.5%, and private student loan APRs range from around 1% to 13%, according to Experian. So, even the most expensive private student loans are cheaper than the average credit card. Existing credit card accounts have an average APR of around 16%, while new offers have an average around 20.16%, according to WalletHub.
What You Should Know About Debt Costs
The simple reason why you should pay off your credit card first is that you will likely accrue more interest charges over the same amount of time with your credit card than with your student loan.
Paying down the debt with the highest interest rate first ensures that you have the quickest, least-expensive possible path to getting debt-free.
If you happen to be the rare case with a student loan APR that’s higher than your credit card APR, you should focus on the student loan.
Both credit cards and student loans usually have daily compounding interest. That means each day you owe interest on not just the principal debt, but also on all previous interest.
Even though it’s good to focus on the debt with the costliest interest first, it’s important to stay current with all debts. You shouldn’t forego a payment on the less expensive debt just to pay extra on the more expensive debt. Missed payments will damage your credit score and likely lead to costly fees.
Other Ways To Pay Off Debt
Get a balance transfer card: One alternative way to lessen your debt load is to refinance some or all of your debt by moving it to a 0% balance transfer credit card (if you have at least good credit). Just make sure you can pay off the full loan amount before the 0% period expires, as these cards tend to have high regular APRs.
Plus, there are often balance transfer fees in exchange for 0% introductory periods. You can use WalletHub’s free balance transfer calculator to see which card will save you the most money.
Take out a personal loan: Another way to pay off debt is to take out a personal loan with a lower interest rate. Just make sure you get an APR that is a lot lower than the APRs on both your credit card and your student loan.
Student loan forgiveness: You should also look into whether you’re eligible for student loan forgiveness. If you work for the government or a non-profit, you may be eligible for Public Student Loan Forgiveness (PSLF) after about 10 years of payments (120 qualifying monthly payments). Otherwise, people with federal student loans may be eligible for forgiveness after 20 - 25 years, based on their income.
Ultimately, if you’re thinking of paying off your debt with a balance transfer card or personal loan, you’ll need to make sure your credit limit or loan size can accommodate your existing debts.
When deciding whether to pay off a loan or credit card first, it’s usually best to choose the one with the higher APR. The higher a debt’s APR, the faster interest accumulates, and the more expensive it will be to pay off. For example, if there’s a 15% APR on the credit card and a 25% APR on a personal loan, it’s much wiser to focus on paying off the personal loan first, and vice versa.… read full answer
However, if your loan is backed by collateral, such as a secured personal loan or a home equity loan, that might change your decision. Paying off that loan first will mean that you’ll no longer have a risk of losing the collateral, which is especially important if the loan is secured by your house. But if you’re talking about unsecured debt, the APR should take precedence in your decision.
Why It’s Usually Best to Pay off a Credit Card First
Credit cards tend to have high APRs – the average for new offers is about 19%, and the average for existing accounts is roughly 15%. Compare that to personal loans, where the average is closer to 10%, according to data from the Federal Reserve. So in many cases, paying off a credit card first will be the better idea.
Credit card interest compounds daily, too. That means every day you owe interest on both the principal balance and the interest you’ve already accumulated. In contrast, personal loans can have compound or simple interest. With simple interest, the more common method, you only owe interest on the principal balance. And personal loans with compound interest can compound less frequently than credit cards, such as monthly or annually. This is just another reason why credit cards tend to be more expensive.
Consider Paying Off Both at the Same Time
That said, you don’t necessarily have to choose between paying off a loan or a credit card first. You could get a personal loan to pay off those two debts at the same time and consolidate them together into one large balance with one monthly payment. This is worth looking into only if you’re able to get a personal loan whose APR is lower than the current APR on both your credit card and loan debts.
Just watch out for any origination fees that might take away from the savings you get with a lower APR. You’ll also need to make sure you qualify for a loan with a high enough dollar amount to pay off the existing debts.
Alternative Consolidation Option: Balance Transfer
Another option is to consolidate by moving both debts to a balance transfer credit card. These cards give an introductory APR of 0% for a certain number of months, up to 18-21 months in some cases. But after the 0% period expires, you’ll owe interest at the card’s regular APR, which is usually high.
So balance transfer cards are best for debts you can pay in full by the end of the intro period. Consolidation loans are better for debts you want to pay off over a longer period of time at a consistently low APR.
Finally, don’t forget that if you keep your debts separate rather than consolidating, you can’t make payments on just one balance and ignore the other(s). Both credit cards and loans require minimum monthly payments. You must pay the minimum on both each month, or risk credit score damage. But anything you contribute above your required minimum payments should go to the debt with the highest APR.
A credit card consolidation loan is a good idea if it reduces the cost of your debt and allows you to repay what you owe sooner than you would otherwise. Furthermore, a credit consolidation loan is the best choice if it will save you more than the top balance transfer credit cards… read full answer.
Credit card debt consolidation loans help put all your balances in one place. But they’re not worth it unless you also get a reduced interest rate relative to what you’re currently paying. Checking with a personal loan provider to see what rates you’re pre-qualified for should give you an idea of whether you’ll actually save money if approved.
If you can qualify for a balance transfer credit card that will accommodate all of your debt and provide a 0% introductory interest rate for 12+ months, that may be a better choice. That’s easier said than done, however, so it’s a good idea to keep your options open.
Credit card consolidation loans are a good idea when they:
Save you money on interest.
Help you get out of debt sooner.
Offer a better deal than balance transfer credit cards.
If you can’t find a credit card consolidation loan that will save you money, or qualify for any good balance transfer cards, there are a few alternatives to consider. A secured personal loan or home equity loan could get you lower rates, but at the risk of losing your property/home if you default. A loan from a friend or relative could get you low rates but could put stress on your relationship. Finally, other debt solutions like settling with your creditors may be helpful.
It’s better to pay off a credit card first, before a car loan, in almost all cases. Credit cards tend to have far higher APRs than car loans. The average APR for all cards in circulation is around 15%, and the average for new offers is around 19%. With car loans, the … read full answeraverage APR is around 3% - 6%, depending on what type of lender finances the loan and whether the car is new or used.
It’s best to pay off debt with the highest APR first because the higher the APR is, the faster interest builds up. That’s especially true with credit cards, whose interest compounds daily. With car loans, you generally pay interest only on the principal and not previous interest charges, too. However, a car loan may not be cheaper than a credit card 100% of the time. So focus on paying off whichever debt is the costliest first.
Whichever balance you decide to focus on paying off first, your credit card or your car loan, make sure to continue making at least the minimum required payment on the other each month, too. Otherwise, you could owe late fees and suffer credit score damage. And if you miss payments on your car loan, you could potentially lose your car.
There is another option, though. You could pay off both your credit card and your car loan at the same time by taking out a new personal loan to consolidate what you owe. But that’s only worthwhile if you can get a personal loan APR that’s lower than your credit card and car loan APRs. Beating your credit card’s rate should be easy enough, but car loan APRs are already pretty low. Plus, you’ll need to be able to take out a loan that’s at least the size of your existing debts put together.
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