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.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|4.99% – 29.99%3||$10,000 - $35,000|
|5.99% – 18.99%4||$5,000 - $50,000|
|15.49% – 34.49%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|