Repayment

Should You Pay Off Credit Cards or Student Loans First?

people analyzing if they should pay off their credit cards or student loans first

Topics: Repayment

Which do I tackle first? There is no easy, one-size-fits-all answer to this one. Simply put, it depends. There are many items to consider when coming up with any debt repayment strategy. You have to be sensitive to both your current budget and your future financial goals. This article will shed some light on the pros and cons of student loan vs. credit card debt, and hopefully help you apply the right repayment strategy for your specific situation. 
Let’s examine the two different types of debt, by starting with student loans.

Student Loan Debt

Affordable Interest Rates

Compared to credit cards, student loans carry a much lower interest rate on average. This means if your loan balance is roughly the same as your credit card balance, you’ll pay less total interest over the life of your student loan than you would on your credit card. Making the minimum payment on your student loan while paying that high-interest credit card off quicker can save you money in the long run.

Interest Paid is Tax-Deductible

Student loan debt is something the government sees as an investment in your future. If you meet the qualifications, you may be rewarded with a tax deduction for interest paid (up to $2,500) on your student loan throughout the year.

Student Loans are not Dischargeable in Bankruptcy

Both federal and private student loans are practically impossible to discharge in a bankruptcy proceeding. This means student loan debt is likely to be a part of your life until it is completely paid in full. 

Some Student Loans Qualify for Forgiveness

It is true that certain borrowers may qualify for forgiveness programs, such as Public Service Loan Forgiveness which could pardon your remaining student loan debt after 120 monthly, qualifying payments. But did you know that if you were enrolled in a specialized repayment plan, such as Income-Based Repayment, the remaining balance of your qualifying student loans could be forgiven after a period of 20 or 25 years? 

Employers May Offer Student Loan Repayment Assistance

It’s unlikely you will find an employer willing to pay your credit card off for you, but a growing number of employers are offering student loan repayment assistance. Check with your HR department to find out if this option exists at your place of employment and what the qualifications may be. You may even want to factor a benefit like this into your job hunt.

Credit Card Debt

A Good Way to Build and Boost Your Credit

Because credit cards are a revolving credit line—and payments are due pretty much immediately upon use—your card issuer begins reporting your payment history to the credit reporting companies (like Experian, Equifax, and TransUnion) right away. This may have already helped you establish and build a solid credit profile faster than any of your student loans. So keeping your credit card in good standing (and preferably paid in full each month) is an excellent long-term play for your FICO® or VantageScore®

A word of caution: it is better to pay the balance in full and not close your account than to formally close a credit card. Having an open, available line of credit that you don’t use can actually help your credit score.

Late Fees

Missing a payment on a credit card can (and often does) result in late fees. These fees can add up, and sometimes are even more than the minimum payment that was due. Keep this in mind when using plastic to cover expenses.

High Interest Rates

Credit cards tend to have higher interest rates than student loans. According to creditcards.com, the national average interest rate for credit cards is 16.06% (as of 7/25/2017). Interest rates for federal and private student loans tend to be significantly lower.

TIP: If you were thinking of using a credit card to pay for tuition or other school related expenses, check out our article Should I Pay My Tuition With a Credit Card. And remember that private student loans not only offer competitive interest rates, but the funds can be used for more than just tuition. Private student loans can help with housing, transportation, laptops, books, and more. So explore all of your options before you default to using your card.

Repayment Strategies

Set Your Credit Card Bills up on Autopay

If you find yourself in a situation where you are carrying a balance on your credit card (i.e., not paying it off every month) one of the best ways to avoid late fees is to set up an automatic payment for your account. You can always pay more each month if you have the funds, but setting up an automatic payment will help to ensure that you get your bill paid on time each month.

Sign-Up for Auto-Debit for Your Student Loans

Most lenders offer a discount for borrowers who enroll in automatic debit. Discounts generally range from 0.25% to 0.50%. On a balance of any amount, but particularly high student loan balances, these small discounts can add up to big savings.

Pay More Than the Minimum

If you pay only the minimum on any debt, it will take longer to pay off and you will pay more in interest over time. Adding as little as five or ten dollars per month to the minimum due can make a noticeable difference in what you pay in interest over the life of the debt. Not only will you get out of debt quicker, but you will save money doing it. According to Andrew Thrasher, CMT and Portfolio Manager with Financial Enhancement Group, LLC, "You want to make sure at least minimum payments are being met on all debt. If a payment gets missed then even more problems and headaches can occur."

piggy bank interest rate chart

Assess Your Debt and Prioritize Repayment

There are a few different ways to approach debt. You may choose to pay off your highest interest rate debt first, putting all your extra available funds toward that debt (while maintaining minimum payments on everything else). This will save you money on the interest you pay overall.

Another popular approach is to pay off your debts from smallest to largest. This can help you eliminate smaller debts altogether, giving you the psychological boost by conquering your debts and crossing them off your list. Once one debt is paid off, take the amount you were paying on that debt and add that to the payment for the next debt on your list. You might not save as much mathematically, but this theory can create a lot of momentum and keep you focused on your goal.

Another option for making debt more manageable is student loan consolidation or private student loan refinance. Check out StudentLoanConsolidator for more information on federal and private student loan consolidation, to see if one of these options is right for you.

Whatever strategy you choose, having a strategy is key to not becoming overwhelmed.

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