Should I pay off my student loans or credit cards first?

multiple credit cards

If you’re working to pay off multiple debts, you’re not alone.

Everyone’s situation is a little different: interest rates, outstanding balances, and just different attitudes about debt. Some people find focusing on one specific debt at a time is the best way for them to pay off multiple debts, and seeing those small wins are a great boost to keep going. On the other hand, if all else is equal paying off the loan with the higher interest rate (known as the avalanche method) is mathematically the way to save the most money.

Whichever method you choose, here are 5 tips for how to pay multiple debts off.

1. Keep all debts current.

If you want to focus on paying one of them off sooner, you still need to keep them all current. Paying at least the minimum amount every month is essential. Not making minimum payments will result in extra interest, late fees, and will likely lower your credit score.

2. Understand the interest rates.

The average credit card rate is well over 20% while debt like student loans vary between 4-10%, depending on the lender. For example, a $10,000 student loan at 4% APR (annual percentage rate) paid over 20 years would cost you $4,544 in interest. A $10,000 credit card balance at 20% APR paid over 20 years would cost you $30,771 in interest. If your credit card rates are much higher than the student loan rates, you could save a lot on interest by paying off your credit cards first.

3. Consider impacts to your credit score.

Another important factor is credit utilization. Credit utilization is a combination of how much credit you have (how much you’re allowed to borrow) and how much credit you’re using (how much you have borrowed). Lowering your ratio (by paying off your credit card) will have a positive impact on your credit score. Installment loans, like student loans, don’t affect your credit utilization ratio, but credit cards do.

4. Understand all your payment options.

Some types of loans may have forgiveness programs and flexible repayment options that allow you to delay making payments. Credit cards don’t typically offer flexible payment plans other than the minimum monthly payment option. If you have to make a hard choice about which debt to pay, make sure you consider which has more friendly alternatives as an option.

5. Know how lenders view different debts.

Lenders sometimes categorize certain debts as good or bad. Student loan debt is typically considered good debt by lenders while credit cards are usually considered bad debt. If you’re applying for an auto or home mortgage loan, this can be a factor in getting approved.

For these reasons, it’s almost always better to pay down high interest debt like credit card debt first. Want to get an objective opinion based on your personal situation? Head to the dashboard and chat with BrightDime coach today!