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Frequently asked financial questions are questions that I’ve seen pop up over and over again.  I thought I’d take the time to answer them in this Frequently Asked Financial Questions Series. So each post will have a short quick answer to these frequently asked financial questions followed by a longer more detailed answer.

Should I Pay Off Credit Card Debt or Student Loans First?

Short Answer:

So long as you don’t default on either, it is probably best to pay off credit cards first. Why? Because credit cards are considered revolving debt. Meaning they can have a bigger negative impact on your credit score if you maintain a balance on them.

Although student loan debt is still debt, and you should want to eliminate it, it will most likely not affect your financial standing as harshly as credit card debt over time. 

For example, student loan debt typically has a lower interest rate, can be tax deductible, and can actually help your credit score in certain circumstances. All of these factors play a part in why you should pay off credit card debt first.

Long Answer:

So now you know which debt is the most important to pay off first, but WHY should you pay off credit card debt first?


How Debt Impacts Your Credit Score

Both your student loan debt and credit card debt will impact your credit score. However, the type of impact varies. Student loan debt, unlike credit card debt, is not considered revolving debt which means it doesn’t impact your credit utilization, one of the biggest factors in calculating your credit score.

Credit Utilization

Your credit card debt, on the other hand, is usually at the heart of your credit utilization. The higher your credit utilization, the lower your credit score. For example, if you have a credit line of $10,000 and currently have a balance of $6,000, your credit utilization is 60%.

You want to keep utilization below 30% and ideally below 10%. The more you utilize a card, and the less you pay on it, the riskier you look. Not only will this make it hard for you to approved for other loans in the future (should you need them), but it will also negatively impact your credit score. A lowered credit score can even impact you in unexpected ways, like getting a new phone or apartment, and possibly even a job.

Payment History

Another big factor when calculating your credit score is your payment history. As long as you are paying the required monthly minimum for your student loans on time every month, your student loans help to provide a balanced credit mix.

So you shouldn’t skimp on your student loans just to pay off credit cards! If you have to pay minimums on student loan debt for a while to eliminate your credit card debt, that’s okay. It still gets reported as being paid on time, and your credit score should still improve.

Related:

FAFQ: How Important is My Credit Score?

How I Raised My Credit Score by Over 100 Points

Credit Cards Usually Have Higher Interest Rates

Even when you have large amounts of student loans, the interest rate is generally lower than it is on credit cards. But even a small credit card could cost you a small fortune in the long run. The average credit card boasts anywhere from a 14-20% interest rate, and that’s just a ballpark. There are many credit cards that have even higher interest rates.

Student loans, on the other hand, tend to top out around 9% and can be much lower depending on when you went to school. If you have private loans, you always have the option to refinance to save on interest or your monthly payment. 

Wrapping it Up with a Bow on Top

At the end of the day, you should pay off whatever debt you can as fast as you can. However, due to the impact on your credit score and overall financial standing it is likely wisest to pay off your credit cards first so long as you are still able to keep up with your student loan payments.  If you need help prioritizing all your debt and determining the best method (snowball, avalanche, nor’easter, and/or snowflake) for paying off your debt you can read my post on Prioritizing Your Debt.

Read more from the Frequently Asked Financial Questions Series.

Money tools & resources i recommend

Chime (for saving) works by starting a spending account (takes 5 minutes) and opting into the automatic savings plan. (Learn more about getting started with Chime).  Every time I use the Chime Debit Card it rounds up my purchase to the nearest dollar and puts in in savings. Right now they also offer a double round-up bonus on those savings. All those withdrawals add up over time. Chime is free to use, with no monthly fees. With Chime, you end up saving money without having to think about it.

Qapital (for building savings & reaching money goals) Qapital can help you reach savings goals. Once you have the Qapital App installed and a bank account (or in my case three) connected you set up a goal or goals.  Then you set savings rules for each of your goals. For example, I have a round up to the nearest $2 rule, a guilty spending rule -when I buy Dominos. Qapital is free to useBonus, when you use my link you'll get $5 after your first savings.

Qoins (for debt repayment) When you sign up for Qoins, you connect your bank account and then spend as you normally would. Qoins will round up your purchases to the nearest dollar and put that change towards an extra debt payment. Learn more on How Qoins Can Help You Pay Off Debt Faster

SoFi (for refinancing) If you have private loans or your debt to income ratio allows, consider refinancing with a company like SoFi. Learn more about what it's like to refinance with Sofi. Refinancing my bar loan with SoFi ended up saving me over $1,000. Use my link to refinance your student loan and you'll get a $100 bonus.

Liz

Liz is a blogger helping people with personal finance and working for themselves. She shares her own journey to debt freedom and helps graduates dealing with above average student loan debt on her site, Less Debt More Wine. She currently resides in NC after calling Massachusetts home for nearly a decade.

  • Matt says:

    Agree on the credit card approach to paying down debt but I am ending up taking a different approach.

    I have a credit card balance of about $6k with an interest rate of about 18%. Which, is killing me. One of my smallest student loans is about $2500 with an interest rate of about 7%. I’m trying to get some sort of debt snowball effect going so I’m opting to pay down the $2500 balance first to make myself feel like I’m having some sort of victory.

    • Liz says:

      Ultimately, whatever is going to keep you motivated is what is best for you. You may pay more in interest long term, but you can’t really quantify that feeling of accomplishment that keeps you going to pay off the next debt. Good luck with paying off that student loan! In the meantime, I’m always hesitant to suggest balance transfers, but 18% interest is a lot, maybe you can find an offer that would suit your needs to cut down the amount of interest you pay.

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