Student loans and credit cards are two of the most commonly borrowed types of debt – and the two most difficult to repay. Focusing on one debt at a time is the most effective way to pay off multiple debts.
Using this strategy, you will make large, lump-sum payments with only one specific debt and minimum payments to everyone else. Finding out whether to pay off student loans or credit cards first can be difficult.
Before you pay off any type of debt promptly
Make sure you are current in payments on all your accounts. You do not benefit from completely ignoring one debt payment, so you can pay off another. Not only will falling behind hurt your credit score, but it will also make it harder for you to capture and pay off your account.
To consider whether to pay off student loans or credit cards first, we will confront each other in several important repayment categories. The “loser” gets a point in each category. The debt that has the most points at the end is the first to pay. These are the repayment factors to consider:
- The consequences of non-payment
- The ability to repay debt
- Repayment flexibility
- Ease of catching on balance sheets to date
- Long-term debt costs
- Total balances
- The ease of borrowing even with debt
The consequences of non-payment
Both student loans and credit cards are unsecured debt.
This means that there is no debt-related collateral such as a mortgage or a car loan. If you have made your payments, the creditor or lender cannot automatically recover any of your assets to satisfy the debt. There is an exception to federal student loans. In some cases, your federal tax benefits may be held to meet federal student loan debt.
Failure to pay both types of debt affects your credit score. After several months of missed payments, the lender or lender can hire a third-party debt collector to continue the debt. You can be sued for arrears and a lawsuit can result in a judgment against you. In addition to the judgment, the court may approve a down payment or bank payment. This collection route can occur with credit cards due or student loan payments.
Verdict: The possibility of tax refunds contributes to the non-payment of student loans slightly worse. Student loans get the point in this round.
Ability to cancel the debt
One of the biggest differences between student loans and credit cards is the relative ease of bankruptcy debt. Student loan debt may be released in bankruptcy, but the burden of proof is heavier.
You have to prove that paying down your debt will cause you to live below the minimum standard of living, that you are unable to make payments for a significant portion of the repayment period, and that you have already (unsuccessfully) tried to work out a payment plan with your lender. This level of evidence is usually not required because credit card debt is bankrupt.
Some student loans are eligible for forgiveness programs that will offset some or all of your debt. This type of debt repayment is not available with credit cards. In some cases, credit card issuers may cancel part of their outstanding balance as part of the settlement agreement you are negotiating.
However, settlement agreements like this are not common, they are bad for your credit card and are usually only done with past credit card accounts. If your account is in good standing, your credit card company will not have a settlement agreement.
Verdict: Student loans can be forgiven and fired in bankruptcy (in certain situations). Credit cards lose this category because the only options for debt cancellation – bankruptcy and debt settlement – are detrimental to your credit score. both are detrimental to your credit score.