4 Reasons to Pay Credit Card Debt First Then Loans

Windfalls can bring two emotions at once, the happiness of having extra money and the stress of how to spend it. If you have too many credit cards and loans, it’s better to let go of your investment plans and prioritize a debt to pay off first. You can thank your lucky stars that you have some extra money to do it better. Don’t worry if you haven’t earned any extras; you can still prioritize which debt to pay off first and stay on top of your credit report.

Deciding between credit card debt and personal loans could be a tough call for you. To substantially reduce your debt burden, you can choose to pay your credit card dues first (as here, we are assuming that your credit card debt is your highest interest debt). That doesn’t mean you completely ignore your loan payments. Sometimes it’s better to focus on one debt at a time to pay off multiple debts fast and get back on track.

Even if you’re still not convinced, here are four reasons why you may want to consider credit card debt over a personal loan:

Reason 1: High-Interest Rate

Usually, credit cards have high-interest rates attached to them. If you’re paying a higher interest rate on your credit card than your loan payments, paying off your credit card debt first can help you save a considerable amount of money. Meanwhile, you could get a new loan with a reduced interest rate, which can help to pay off your title loan with the second-highest interest rate. This can help you lower the burden on payments while trying to pay off the highest-interest debt. If you can manage to pay the same amount for the next-highest interest rate, you’ll be able to clear all subsequent debt payments sooner than you ever thought possible.

Reason 2: Effect on Credit Score

The second reason to give priority to a credit card is very straightforward. However, before that, you need to know what credit utilization means. The ratio between your outstanding credit card balances and your credit card limits gives you your credit utilization ratio. It is inversely proportional to your credit score. So, if you have a high credit utilization on your credit cards, you can probably expect a low credit score. To improve your score, you need to maintain a perfect balance between the amount you owe on all your cards and your total available credit limit. You may not have to worry much about this factor if you’ve borrowed a student loan for that matter.

Reason 3: Flexible Repayment Options

Unlike minimum payments each month on credit cards, an installment loan like a student loan or title loan gives you much more flexibility in terms of repayment plans. Many lenders consider your ability to repay the loan while deciding upon your monthly payment amount. Some may even consider your request of restructuring your loan and extending its tenure. If this happens, you can pay off your credit card balance sooner by making payments more than the minimum amount you used to pay each month.

Reason 4: Chance to Chase Past Dues

If your mortgage payments are late, you have more options to catch up. Your lender could be willing to help you out if you’re honest about not being able to make payments on time. You might also have the option of merging the past due amount into your loan amount and work out a new payment plan for you. On the contrary, falling behind on your credit card payments may lead you to a bad credit situation and, in a worst-case scenario, your account may be charged off as a bad debt.

Getting a loan or credit card seems much easier than keeping track of their due dates and payments. You may fall in the trap of excessive borrowing and not know which one to pay off first. These reasons can then help you get out of the debt that was bothering you the most and help you simultaneously deal with the rest.

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