Dear Tori: What Debt Should I Pay Off First? Credit Card vs. Student Loan Debt

“Hey Tori,

When you have two pieces of debt, how do you know which to pay off first? I have $35,000 of student loan debt, and $15,000 of credit card debt on two different cards. All of it seems equally overwhelming, and I don’t know where to start. So far, I’ve been putting an extra $50 towards my student debt, and then an extra $50 to my credit cards — is this a good idea?”

I’m an amateur personal finance geek.
Your tools have helped me become a smarter investor.

Melanie

Personal Capital Dashboard User, February 2021

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This is a question that I frequently hear — when you have any sort of debt, it’s hard to know what to do first (especially when it feels like you’re drowning.) 

The best way to determine what sort of debt you pay off first is the one that’s costing you the most, in other words, the one with the highest interest rate. Typically, credit cards can have an interest rate between 15-30%, which is usually considered high-interest debt. Student loans’ interest rates can range from 3-7%, making them much less expensive than credit card debt.

Because you have debt on two different cards, it’s important to figure out which one is more expensive for you right now so we can start paying that off first.

What to do with your debt, and when…

Step 1

The first step to paying off debt is knowing what your interest rates actually ARE.

This is one of those money steps that many people avoid, either because they don’t understand exactly what interest is, or simply don’t want to look at it (both are understandable.)

The easiest way to check your interest rate is by logging on to the company’s online platform and finding it there. You can also call customer service and ask. 

Step 2

This money step is a little like ripping off a Band-Aid…Grab yourself some wine and check your debt balances. 

You can log this in a spreadsheet, a notebook, or link your credit card accounts to Personal Capital’s dashboard to see your balances all in one place.

Now you’re going to organize your debt in two ways: first by interest rate, then by the current balance.

For example, you may organize your debt like this:

Chase Freedom Card. 18.5% interest. Balance: $4,000.00

Capital One Quicksilver. 22% interest. Balance: $11,000

Sallie Mae Student Loan. 4.3% interest. Balance: $35,000

Step 3

Many forms of advice would tell you to start paying down the one that’s costing the most interest, so in the above example, you should pay down the debt with 22% interest. 

HOWEVER, if you know you need to be seeing progress in order to stay motivated and to keep going— you may want to consider getting rid of the debt with a lower balance ($4,000) first. Personal finance is, yep, personal — choose what’s right for you.

Regardless, though, you need to pick ONE to focus your energy on. (This does not mean you stop paying your minimum payments as you should always pay at least your minimum payments on all credit card debt you have). Do not try to aggressively pay down both at the same time, and do not spread your money between both of them!

While we will be aggressively paying down our debt, it’s EXTREMELY important to not go into more debt, especially more credit card debt. In other words: Emergency Funds are for emergencies, credit cards are not. It’s super hard to dig yourself out of a hole while at the same time, shoveling sand back in it. This is why we set aside an emergency fund FIRST, to cover us should something happen.

Where you can and will get tripped up: stay consistent. 

There’s no magical debt elimination button. There is no magic wand. It’s hard work.

Know that myself, your financial advisors, or online financial tools like Personal Capital’s free dashboard are here to support you every step of the way.

–Tori

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*Personal Capital compensates Tori Dunlap (“Author”) for providing the content contained in this blog post. Additionally, in a separate referral arrangement between Author and Personal Capital Corporation (“PCC”), Author is paid $70 and $150 for each person who uses Author’s webpage (www.HerFirst100k.com) to register with Personal Capital and links at least $100,000 in investable assets to Personal Capital’s Free Financial Dashboard. As a result of these arrangements, Author may financially benefit from referring potential clients to Personal Capital and/or be incentivized to present blog content that is favorable to PCC. No fees or other amounts will be charged to investors by Author or Personal Capital as a result of the Referral Arrangement. Investors that are referred to PCC and subsequently subscribe for investment advisory services provided by PCC’s affiliated adviser, Personal Capital Advisors Corporation (“PCAC”) will not pay increased management fees or other similar compensation to Author, PCC or PCAC as a result of this arrangement. Additional information about PCAC is contained in Form ADV Part 2A available here.