- March 15, 2017
- Posted by: Alyssa Plumb
- Category: Blog
What debt should I pay off first? Credit cards or personal loans?
Those who have a lot of debt may finally come to the realization that the weight is too heavy to bear. Bankruptcy is a last resort and should be avoided if at all possible. And if you want to avoid bankruptcy and pay off your debt, it might be overwhelming to figure out exactly where to start. You probably have a form of installment loan such as a personal loan or auto loan as well as a lot of credit card debt. Most Americans are drowning in thousands of dollars in these different types of debt.
Many experts recommend choosing one loan and paying it off first and then moving on to another loan. So what should you pay off first?
Difference between personal loans and credit cards
The balance on a credit card will change every month based on how much you are spending and how much you pay off. There is a minimum payment on the card that must be paid monthly, and it changes based on a percentage of the balance on the card.
On the other hand, personal loan payments are fixed and are just a percentage of the principle balance and interest on the loan. If you want to know which one you should pay off first, it is your credit card debt. Here are the reasons:
The interest rate on your credit cards will likely be higher than on a personal loan. So if you pay off credit cards first, you’ll pay less interest total over time.
Credit score concerns
If you pay off your credit card, you will lower the amount of available credit you are using which means you’ll be able to pay off your credit card. However, paying off a personal loan just lowers the amount of credit you have available to you and increases how much of the available credit you are using. That will lower your score or at the very least, it won’t change.
You should get a personal loan to consolidate debt and pay it all off at a lower interest rate if you have all credit cards. This will make it a lot easier to pay everything off.