Should I Pay Down Credit Card or Student Loan Debt?October 27, 2020
Dealing with student loans can be incredibly challenging for many college graduates. According to Experian, Americans carry an average student loan balance of $35,359. On top of that, the average credit card debt is nearly $6,200, says the credit reporting agency.
In most cases, targeting one debt at a time can help you pay off your balances faster and save you more money on interest. So should you pay down credit card or student loan debt first?
Here’s how to develop your strategy:
Should You Pay Off a Credit Card or Student Loan First?
In the vast majority of cases, it’s better to prioritize your credit card debt before your student loan debt. This is primarily because credit cards charge higher interest rates than student loans.
Additionally, credit cards don’t have set repayment schedules, so it’s easy to add to your balance even while you’re paying them off. As a result, credit cards may keep you in debt for longer than student loans with firm repayment terms.
For example, let’s say you have the following debts:
- A credit card balance of $7,000 on an account with a 20% annual percentage rate (APR) and a $120 monthly payment.
- Combined student loans worth $30,000 with a weighted-average rate of 6.5% and a $341 monthly payment.
In total, your minimum monthly payment would be $461, and if you were to pay just that amount and add no new debt to your credit card, you’d pay off the student loans in 10 years and the credit card in a little more than 11 years. You’d also pay a total of $24,739 in interest over that time.
Now, let’s say you could afford to put $510 toward your debt every month. If you were to add the extra payment toward your credit card debt until it was paid down, your balance would be paid off in a little under six years. Then if you use the total amount you were putting toward your card toward your student loans, you’d pay those off about a year and a half early. You’d also save $9,643 in interest.
If you were to do the opposite and focus on your student loans first, you’d pay those off sooner, but the higher interest rate on your credit cards will result in more total interest charges.
You can use a debt avalanche calculator to find out what you could save with your specific situation.
Can You Pay Off Student Loans with a Credit Card?
Another thing you may be wondering is, can you transfer student loans to a credit card? The U.S. Department of the Treasury doesn’t allow federal student loan servicers to accept credit cards as a payment method, and it’s unlikely you’ll find a private lender that offers it as an option.
But you still can technically use a credit card to pay off a student loan by using the balance transfer feature.
Many credit card issuers send out blank balance transfer checks that you can use to pay off other credit card accounts or other types of debt. These checks often include an introductory 0% APR promotion, which could potentially save you money as you pay down your balance.
To use one to pay off student loans, you’d write the check out to your loan servicer and submit it as payment or write the check to yourself and deposit it into your checking account, then make a payment.
But just because it’s possible to do this doesn’t mean it’s a good idea. In fact, you’ll be hard-pressed to find a scenario where using a credit card balance transfer to pay off a student loan is the right move. Here’s why:
- Balance transfers come with fees, which can range up to 5% of the transfer amount.
- If you don’t pay off the balance before the promotional period ends, you’ll be stuck paying a higher interest rate, which can be in the mid teens or even upwards of 20%, on the remaining balance.
- The lack of a set repayment term on a credit card can make it more difficult to stick to your repayment plan and keep you in debt longer.
In other words, if you have credit card debt, using a balance transfer credit card to pay it off interest-free is generally a good idea. But it’s not worth doing the same thing with your student loan balance.
If you have a cash-back rewards credit card, you can also opt to use your rewards to help pay down your student loans.
Using Your Credit Cards Wisely While You Have Student Loan Debt
In an ideal world, you’d never carry a balance on a credit card because when you pay your bill in full every month, you’ll avoid interest charges. But if your financial situation is tight because of student loan debt and other obligations, it can be difficult to avoid.
Whether or not you can afford to avoid credit card debt right now, here are some tips to help you limit your exposure to the risks they present:
Always pay on time
Even if you can just make the minimum monthly payment, paying on time will ensure that you don’t get slapped with late fees and a ding to your credit score. If you do miss a payment, make sure to get caught up quickly — you won’t avoid a late fee but late payments aren’t reported to the credit bureaus until they’re past due by 30 days.
Try to avoid a high balance
Your credit utilization rate is the percentage of available credit you’re using at a given time. So if you have a $1,000 balance on a card with a $2,000 credit limit, your utilization rate is 50%. There’s no hard-and-fast rule for what your rate should be, but the higher it is, the more damage it will do to your credit score. So if you can, try to keep your balance as low as possible relative to your credit limit.
Seek lower interest rates
As you work to pay down credit card debt, a balance transfer card with a 0% APR promotion can be a great way to save money on interest charges, even if you can’t pay the balance in full before the promotional period ends. If you can’t qualify for a balance transfer card, you may try to call your card issuer and see if you can get a reduced interest rate. There’s no guarantee your request will be granted, but credit card companies will sometimes offer a lower rate for at least a short period.
Avoid using your card as you pay it off
If you keep adding charges to your credit card while you’re paying down the balance, it can feel like you’re taking two steps forward and one step back. If you can, try to stick to using cash or your debit card while you pay down your debt — at least for most of your expenses — to make it easier to achieve your goal.
As you take these steps, you’ll be able to avoid some of the drawbacks that come with using credit cards regularly. They’ll not only help preserve your credit score but also make it easier to pay off your balance, so you can turn your focus to your student loans.
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