4 Reasons Credit Card Debt Is More Expensive Than Student Loan Debt

credit card debt

Paying off student loans can be tough. But student loan debt may take a backseat when compared to credit card debt.

If you are working to get out of debt, paying off credit cards should most likely be your top priority. Here are the top four reasons why carrying credit card debt is definitely worse than student loan debt.

Credit card debt cons to keep in mind

1. Higher interest rates

The first reason credit card debt is worse than student loans revolves around their interest rates.

Student loan interest is usually well below 10 percent, while credit card interest rates often exceed 20 percent. With a cost two to four times higher per dollar, credit cards have a much bigger impact on your finances if you fall behind on your payments.

Even worse, credit cards often charge penalty interest rates if you make a late payment, sometimes as high as 30 percent or more. That’s over four times the 6.80% APR my old student loans charged.

If you only pay the minimum payment on $10,000 in student loans at 6.80% APR, your total out of pocket cost is $3,810.

However, if you have the same $10,000 balance with a 20.00% APR interest rate and only pay the minimum, the cost would be $13,191 since you’re paying an extra $193 per month in interest.

And if you have student loans, you also have the option of refinancing them for a lower interest rate later on if your credit remains in good shape. There really isn’t a credit card debt relief option like that when it comes to lowering your credit card’s interest rates.

2. Credit card debt offers no dividends

When you graduate from college with student loans, you also have an amazing asset: an education. An education and a college degree can ultimately lead to better-paying job opportunities and more.

Credit cards, on the other hand, are most just used for purchases and transactions. A college degree arguably pays dividends for a lifetime, while credit card purchases just lead to high-interest rates.

For example, according to U.S. Department of Labor data, college educated Americans earn on average $1,100 per week. Whereas those with only a high school degree earn an average of $668 per week. Over a 30 year career, that is a $673,920 difference.

Although you could end up paying for a vacation, a new TV, or expensive purse for years, your life will not change dramatically, aside from a lower bank account balance.

3. Your credit card debt can keep growing

Student loans are a type of installment loan. That means you start off with a fixed balance for your loans and then pay it off in installments over time.

Credit cards, however, are a form of revolving debt. That means your balance can continue to grow over time even if you make regular on-time payments.

When you finish school, your student loans won’t grow anymore outside of a few uncommon circumstances like a deferment. Your credit card balance, however, can grow until you reach your credit card limit no matter how much you pay into your balance.

Big transactions like vacation purchases or small transactions like a cup of coffee will keep driving that balance up on your credit card, leaving you in a cycle of debt you can’t escape.

And, thanks to the higher interest rate, it takes longer and costs more to pay credit card debt off while your balance continues to grow.

4. Student loans have an end date

Student loans ultimately lead to a zero balance, usually after ten years of on-time payments. Once your student loan is paid off, the account is closed, and you are done with your loan for good.

Yet, credit cards can stay open as long as you are alive and keep the account in good standing.

You don’t have to make any payments or pay interest on a card with a zero balance. But, you can always make a new purchase and end up right back where you were with expensive, high-interest credit card debt.

This debt cycle can lead to thousands of dollars in interest. That’s something you should always try to avoid.

How to make credit cards work for you

1. Avoid carrying a credit card balance

Although credit card debt can be worse than student loan debt if unchecked, that doesn’t mean having credit cards is a bad thing.

At the end of the day, if you pay your balance in full each month, you’ll never pay a cent of interest on your credit cards.

I’m a serious travel hacker with 14 credit cards open. But I’ve never paid interest on a credit card in my life. I never spend more than I can afford to pay off in full each month.

Keeping up with this strategy helps me keep a high credit score, earn credit card rewards, and saves me money in the long-run.

2. Credit cards can lead to good financial outcomes

After all this talk about how bad credit card debt can be, you might be afraid of having a credit card. Yet, at some point in your life, you will most likely need access to credit.

Just remember, as long as you can manage your credit cards and pay them off in full each month, credit cards can open up a world of cash back and travel rewards.

For instance, credit cards can lead to free flights, hotel stays, rental cars, and cash back in your pocket. While these are all great financial outcomes, it only works if you keep your debt in check and your account under control.

If you can handle that, then credit cards are a great tool to have in your personal finance arsenal.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.19% APR to 11.32% APR (with AutoPay). SoFi rate ranges are current as of July 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.99% APR assumes current 1-month LIBOR rate of 1.22% plus 3.95% margin minus 0.25% autopay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.19% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$5,000 - $50,000Visit LendingClub
5.25% - 12.99%$2,000 - $50,000Visit Earnest
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