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Need Help Deciding Order to Pay Debt
October 15, 2015
9:50 am
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October 15, 2015
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Some background: 3 Student Loans and 1 CCard

Loan Type, Amount, Interest Rate
Private Loan – $40,000 – 5.04% Variable
Fed Loan 1 – $13,000 – 5.125% Fixed
Fed Loan 2 – $2,500 – 5.00% Fixed
Credit Card – $3,500 – 0% until August 2016, then 22%

A caveat on Fed Loan 2 and question: I had a few missed payments on this loan back in Q4 2014 / Q1 2015, so my credit report is showing these 90 and 120 day missed payments and it obviously looks bad (the original payments were set up quarterly, but when I got serious about my financial situation earlier this year I had them changed to monthly and have been on time ever since.) My question is, would it look better to pay the loan off quicker to get it over with or stretch it out to get more “good” history on it before it closes out?

Every article I read discusses different methods of repayment dependent on Interest Rate, but mine are all essentially the same. After budgeting hardcore, I have determined that I have approximately $1600-$1800 per month that I can put towards my $59k debt, but I am trying to determine where the money should go towards. Part of me wants to Snowball Method it and get FL2 out of the way but the above question I asked gives me pause. Part of me wants to pay more towards the bigger loan. Maybe because the interest rates aren’t much different it doesn’t make a difference. I don’t know. Any recommendations would be appreciated…Thank you much in advance.

October 15, 2015
9:50 pm
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Ryan,

Great question.

As I started writing a response, it got so long that I actually ended up converting it to an article and making it a blog post. The full article is here: https://studentloansherpa.com/pay-credit-cards-student-loans-first/ It should cover a lot of the general considerations.

For your specific credit score issue, I don’t know that paying it off any faster or slower will make a difference. You might actually take a bit of a hit when you pay off the loan in full and the account “closes” from a credit score point of view. That being said, I wouldn’t worry about it. The credit score difference in a approaches will likely be minimal if at all. You missed a couple payments and the best remedy for that blemish on your credit report is time. As those late payments get older, your credit score will go up until eventually they fall off the credit report entirely.

In your case, the good news is that a 5% interest rate is pretty decent. There are refinancing options out there, but you may need to wait until your credit score recovers.

I’d be temped to pay off the Fed Loan 2 first, then start on Fed Loan 1, shift to the credit card once I have 2-3 months left of zero interest (you don’t want to get hit with the 22%), go back to Fed Loan 2, and then take on the beast of a private loan. This might not be the most economically efficient method, because your variable rate private loan could go up, so paying it off before interest rates rise might save you the most in the long run. However, the Fed Loans and Credit cards are easier targets, and notching a few wins and entirely eliminating 3 monthly debts within a year or so could be a healthy boost from a mental standpoint.

The most important thing is that you keep consistent with the $1600 to $1800 per month. Cutting corners and spending outside of your budget are often the biggest obstacles.

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