Should You Pay Off Credit Cards or Student Loans First?

Should you pay off credit cards or student loans first?

Should you pay off credit cards or student loans first? At first glance the answer to this question might seem like a no-brainer, but there are a few factors that need to be considered. So before we can accurately answer this, let’s look at all the pros and cons, along with what other financial experts have to say.

Here are a few things that need to be weighed when determining if you should pay off your credit cards or student loans first.

Student Loan Debt

It’s a good investment (or is it?). In theory it’s a good investment because you’re able to invest in your future and your career, by increasing your education. However, it’s now the single largest form of consumer debt in U.S. households today.

Interest paid is tax deductible. Student loan debt is something the government sees as an investment into your future. So they reward you with a tax deduction for interest paid on your student loan throughout the year.

Low interest rate. Compared to the high interest rates of most credit cards, the interest rate on a student loan is close to three or four percent — which is considerably lower than the outrageous rate credit card companies often charge.

Could negatively impact your debt-to-income ratio. As a college student just starting out, making a lower starting salary, having student loan debt could negatively impact your debt-to-income ratio (which is a part of your credit score), and could potentially keep you from your dream of homeownership.

Stays with you for a lifetime. The biggest downside to keeping student loan debt around, is the fact that you’ll be paying it off for a long time — potentially most of your adult life. Federally insured loans can never be discharged in bankruptcy, and in 2005 Congress added privately owned student loans to the list too.

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Credit Card Debt

High interest rate. Most credit cards come with an extremely high interest rate attached to them — sometimes upwards of twenty or twenty-five percent! If you aren’t careful you can get thrown into a cycle of constantly having to make payments every month.

Can be discharged in bankruptcy. Unlike student loan debt, credit card debt can be discharged in bankruptcy. And since this type of debt is unsecured (meaning you don’t have an asset tied it) you can also work out a deal with credit card companies if you fall behind on payments.

Improve your credit score. A solid history of credit usage is one of the factors on your credit report which determines your credit score. If you have a consistent record of paying your credit card bills on time that will help improve your credit score.

We asked some financial bloggers and experts to weigh in on this topic, and to share their personal stories with student loan debt and credit card debt. Here’s what they said:

It Depends on Your Goals

“What are your goals? How high is the student loan APR versus the Credit Card APR? Which one has the higher balance? Which one will provide the greater cash flow? Excellent credit card usage is the most important thing on your credit report. So, if you get that credit card balance below 20% utilization you’re making a great impact on your credit. But…then again…it depends on your GOALS.” – Dominique Brown, Your Finances Simplified

“My first instinct is to say credit cards but it depends. What kind of students loans are they? Are they Federal loans with a low APR or are they private loans with a much higher APR? We paid off our credit cards first since my wife’s student loans have a very low interest rate. This allows allows us to have the credit to use if needed on our credit cards and helps with our credit score.” – Glen Craig, Free From Broke

Consider Assistance Programs

“APR is a big consideration, but also, student loan assistance programs like Income Based Repayment. Through IBR, if you’re working as a public servant, you can take advantage of loan forgiveness after 10 years. Generally though, credit cards have higher interest rates so I’d pay them off first (that’s what we did) as that will have a more noticeable/quicker impact on your life.” – Jesse Michelsen, Anti Necktie

“Military service is one of the ways to obtain student loan forgiveness (as well as using IBR) for federal loans. A few specialties (like medical training) can also have their student loans paid off by the military in exchange for a service obligation. So servicemembers should pay off the credit cards instead. Even if a servicemember deploys under the Servicemembers Civil Relief Act, it only reduces their credit-card interest to 6%. That’s still a higher interest rate than most federal student loans or home mortgages, and the high-interest debt is worth paying off first. Servicemembers should always keep up on their credit-card payments. Credit-card delinquency attracts the wrong kind of command attention much faster than delinquency on student loans or a mortgage.” – Doug Nordman, The Military Guide

What’s Your Worst Situation?

“My first reaction was to pay off the credit cards since I would imagine them to have a higher APR, higher payment, and lower balance. But those are assumptions. The benefit of paying off student loans first would be that you can’t include them in a bankruptcy, so if worst came to worst if they were gone you COULD wipe everything else away.” – Ashley Barnett, Money Talks Coaching

In Summary

So should you pay off credit cards or student loans first? Usually it makes sense to pay off your highest-interest-rate debt first and work your way down from there, but as you can see there are quite a few other factors to consider as well. Your decision about whether to pay off credit cards or student loans first must be made with your unique situation and your own goals in mind. And if you have more than one credit card you may want to read our post “Which Credit Card Should I Pay Off First?” for some specific advice on that scenario.

Either way, it’s important to find the best method for you and what’s best for your unique situation as you work to pay down your debt. If you have a plan you’ll be much more likely to succeed in getting that debt paid off for good.

(If you have questions about these different scenarios, ask us in the comments below)

Image 1 credit: MoneyBlogNewz

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  • John S @ Frugal Rules

    I would also say that it has to depend a lot on what your goals are. I know that the high APR might mean to pay off credit cards, though that is unsecured debt. If I could only pay one I would pay the student loans, though I would do my best to work on paying both.

    • http://carefulcents.com/ Carrie Smith

      Exactly, which is something the other financial bloggers pointed out as well. Understanding what your goals are and having a plan to get there is key!

  • Guest

    This is a good article. My wife and I are pretty lucky to not have much student loan debt. But the little we have is currently taking a back seat to our credit card debt since the interest is still tax deductible. Granted, it doesn’t offer much of a break but it still offers something.

    • http://carefulcents.com/ Carrie Smith

      It’s good your student loans only have a small balance. That just means you’ll be out of debt that much sooner. Good luck!

  • http://www.insiderrealestatetips.com/ Dominique Brown

    Great article carrie. Thanks for using my quote. It’s amazing how personal finance is very personal isn’t it. One size doesn’t fit all for all advice. You have to take into consideration your present and future.

    • http://carefulcents.com/ Carrie Smith

      Oh definitely. Every situation is different as is the advice needed for that situation. Thanks for sharing your perspective!

  • http://www.uniquegifter.com/ Anne @ Unique Gifter

    Wow – that bit about the military rates being dropped during deployment is fascinating. Thanks for sharing. (I’m Canadian, so a lot of this is foreign to me ;-))

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Thanks, Anne – glad you liked the post!

  • Jim C.

    Pretty good article! Although one doesn’t want to assume but it might better be stated as to which one should you pay more of your monies toward and the other closer to the minimum payment required. As this article clearly states that there are factors to consider for every situation. Although the best policy is not to go into debt in the first place! Once you incur debt you limit you future decisions having to make them with a larger influence on paying down debt rather then what you might really like to do instead. Plan early on and you choices will be greater later!

  • marlie

    Student loan interest is only tax deductible if you make below a certain income level. I have a good job that pays well, but my IBR choices means I pay more per month and then don’t have the benefit of interest tax deductions. I can’t win :/