What to Focus on Paying Off First? CC or SL?

[Anonymous]

Hi,

I am a college grad with lots of debt from school. The majority of my debt is in student loans, but I do have some credit card debt also. I am currently repaying my student loans. My grace period ended two months ago. My question is that I have a few hundred dollars every month to pay in addition to the minimum payments on my debt so which should I focus on paying off first? The accounts in question are a credit card with a balance of about $3,100 and an APR of 5.15% and a federal student loan with a balance of about $22,000 and an interest rate of 6.5%. As it is now, I pay more than $100 in interest on the student loan per month and less than $20 per month in interest on the credit card. My instinct is to pay down the student loan more quickly because I'm losing much more money on it in interest. Is my thinking flawed? Is there any benefit to paying off the credit card first? The balance on the credit card is less than 50% of my limit. I'm also not terribly concerned about my FICO score right now, but I would like a new car sometime in the future. The last time I checked my FICO score I believe it was 711, which was summer of 2009. 

I have seen this topic similarly posted here before, but with these balance and interest rates, I wanted to get some advice. Thank you!

Message Edited by laura545 on 02-03-2010 02:16 PM

[tianapb725]

I'm no expert, but I know that you do get to claim your student loan interest on your taxes (up to $2500 I believe), so that's certainly a benefit over the credit card.

[SCF]

Your SL has a fixed APR and terms, and if it is a federal loan, you have a number of protections and ways to reduce or defer your payments if you find yourself in a tough financial situation.  Your CC almost certainly does not have any of those benefits.  In terms of which debt is riskier to hold, I would rather be rid of the CC debt personally, but your argument about the interest is also a good one.  In the end, it's a personal decision, but I would pay down the CC first.

[Jazzzy]

I agree...it's a totally personal decision. These are my thoughts....

You have a good argument about interest rates. And paying the higher interest rate debt does make the most sense if you do the math. However....

Your student loan interest is deductible. I don't know your income, so I can't calculate how much this would save you in taxes...but that is a factor. So...I might pay the cc first.

If you are one minute late on your cc payment, you will likely get hit with expensive penalties. That shouldn't happen, but checks get lost in the mail and electronic payments can get screwed up. It sounds as if you are responsible, but, as said above, cc debt is riskier. Your interest rate could also go up at any moment. So...I might pay the cc first.

Even though you don't care about your FICO score now, you never know when you may need it. Paying down the cc debt will help your FICO score. So...I might pay the cc first.

If you die (terrible thought, right?), your student loan debt is forgiven. Your cc debt will be paid out of your estate. So...I might pay the cc first.

I don't know if you work for any sort of nonprofit, but, if you do, and depending upon who has your loans, some of the total amount may be able to be forgiven after a number of years. So...I might pay the cc first.

Well...I guess it's no secret how I feel. I've got almost $50k in student loan debt, and zero credit card debt. I sleep pretty good at night.

[valley_man0505]

Paying the CC's will have a much greater impact on your FICO since these are revolving accounts whereas the student loan is an installment account.  Also, this frees up more credit space that you can tap back into in case of an emergency.  If you are stictly concerned about the financial ramifications, you will have to take a detailed look at how much the extra interest rate on the student loan will cost you versus how much the interest will help you on your tax return to determine the net effect of the extra interest.