As a new grad, you’re faced with tough financial decisions as you begin life in the real world. One of those decisions is considering which debt to pay off first, student loans or credit cards?
Making an informed decision about which debt to pay off first will help save you money over the life of your loans. As someone who has multiple debt accounts, here are a few questions you should ask yourself when prioritizing what debt to pay off first.
What kind of debt are you dealing with?
The first step is to fully understand the kind of debt you’re dealing with. Then you can compare it to how it will affect your finances and goals long term.
The money you borrow for education, like student loans, is considered “good debt.” This is because it can help further your career and ultimately work out as an investment into your future.
Credit card debt, on the other hand, is considered “bad debt” because it’s consumer debt that has no investment benefit tied to it. It often comes with extremely high-interest rates as well.
In addition, payments made on student loans are often tax deductible, while credit card payments are not. In the event that you own a business, you may be able to take any interest paid on your credit card balance as a tax deduction. But this is a much more limited option.
Are you staying current on all debts?
Before jumping into prioritizing which debt to pay off first, you must stay current with all debt payments. While your goal may be to pay off your debts as quickly as possible, it’s vital that you at least make the minimum payments until you come up with a debt payoff plan.
Missing a debt payment or paying your bill late will result in a decrease in your credit score. This could negatively impact your overall credit history. A good credit score is essential for getting the best interest rates on your loans and qualifying for other financial help.
Landlords and financial institutions will also use your credit score as a way to gauge your creditworthiness. So it’s important to continue making timely payments on all your debts.
Student loan debt vs credit card debt
Student loan debt is usually considered a better investment than credit card debt. So it’s safe to assume that you should pay off your credit cards before your student loans. But, there are several factors to consider as well.
Facts about student loans:
- Interest rates on student loans are significantly lower
- You don’t need a history of credit to get approved for a student loan
- It can take potentially decades to pay off your student loan debt
- Student loans are not eligible for bankruptcy but can be forgiven or reduced
Facts about credit cards:
- Interest rates on credit cards can be very high
- Paying the minimum payment could keep you in debt forever
- You need good or excellent credit to be approved for a credit card
- Credit cards can be discharged in bankruptcy
By reviewing the facts above you’ll be able to use this information to make an informed decision about which debt to pay off first. Whichever debt seems scarier to keep around is probably the one you should pay down immediately, while still paying the minimum payments on your other debts.
Have you considered alternative routes and assistance programs?
Before choosing to pay off student loan debt vs credit card debt, remember that you have options.
There are debt student loan relief assistance and forgiveness programs you can apply for. Depending on whether or not you have a private or federal student loan, you might be able to receive financial help. Here’s a complete list of options and alternatives for student loan help and assistance programs.
Likewise, when it comes to credit card debt you can take advantage of 0% interest promotions, or call your credit card company to ask for a help in reducing your payment.
You may also be able to negotiate a lower interest rate when combining multiple credit cards into a lower monthly payment with a personal loan.
Consider these alternative routes before deciding which debt to pay off first.
Which debt should you pay off first?
So which type of debt is worse, student loans or credit cards?
Both student loans and credit cards can keep you in debt for many, many years if you don’t pay them off quickly. It’s easy to be overwhelmed by both of them if you only make the minimum payments.
In the long term, student loan debt is often worse because of the amount of debt you’ll have before you’ve even started your career. On the other hand, credit card debt comes with very high-interest rates with not much return on investment to show for it.
It really it comes down to your own financial goals and which debt you feel most comfortable with paying off first. Just remember that any kind of debt is still debt in the end, no matter what for it takes, and you don’t want to be shackled by it for the rest of your life.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|