For college graduates with student loans and credit card debt, paying off what you owe can be a daunting task. But with a solid plan, it doesn’t have to be. One of the first things you’ll have to hammer out is what you’ll pay down first—your credit card bill or student loan debt.
How to get started
Financial experts agree that you should always make at least the minimum monthly payment on both your credit card and student loan accounts. Paying on time will ensure that your credit history remains in good standing.
After that, credit card debt should be your top priority when it comes to making extra payments. The reason is simple—federal student loan rates are almost always lower than the interest you’ll pay on credit cards. The average interest rate on new credit cards in December topped 14%. By comparison, federal student loans for the 2014-2015 school year carried a rate of 4.66%.
If you can’t pay
Keep in mind that if you run into a financial hardship, you’ll have the ability to defer your student loan without hurting your credit rating. In some cases, the federal government will also pay your interest fees during a deferment. These options are not available with a credit card.
On the other hand, in the unfortunate event that you have to file for bankruptcy, your unsecured credit card debt can be discharged, or forgiven, by a court. Student loan debt can almost never be dismissed through a bankruptcy filing.
Verdict
On balance, it’s clear that paying down credit card debt, starting with the card that carries the highest interest rate, should take precedent over your student loan.
One method that will help you reduce and manage your debt is to apply for a 0% balance transfer card. That will allow you to transfer your high interest credit balances to a card with 0% APR introductory period.
But keep in mind that your 0% interest rate will eventually expire. That is why it’s important to pay off all or as much of the debt you transferred before the expiration, or you won’t be saving much money at all—money that you could have put toward paying off your student loan.
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The post Credit Card Debt vs. Student Loan Debt: Which to Pay Down First? appeared first on NerdWallet Credit Card Blog.
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