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Which is Worse: Credit Card Debt or Student Loan Debt?

Repayment of student loans is brutal, but credit card interest rates usually make credit card debt a bigger financial emergency.

Written By: Michael P. Lux, Esq.

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Dealing with credit card debt and student loan debt isn’t easy. Figuring out which is worse and what gets paid off first is a bit less complicated.

Most consumers will benefit from knocking out their credit card debt first. This debt is worse because the interest rates are normally higher and because there are fewer resources available to help with repayment.

On the student loan side of things, tools are available to get the debt under control whether you are struggling or thriving.

Student Loan Debt And Credit Card Debt Are Both Bad

Before jumping into the explanation of why credit card debt is worse, it is worth noting that both forms of debt are harmful.

Some people have the notion that student loan debt is “good debt.” The elimination of consumer protections and the increase in tuition costs put an end to the “good debt” fairy tale.

If you have student loan debt and credit card debt, eliminating both debts is a priority. The only question is which debt gets eliminated first.

Why Credit Card Debt Is Usually Worse

Credit card debt is objectively worse because interest rates are usually substantially higher. In the world of student loans, a 10% interest rate is on the high end and considered lousy. For credit cards, a regular interest rate of 13% is considered good.

If you somehow had a student loan with a higher interest rate than your credit cards, the math changes. However, this circumstance is rare.

Credit cards also have less forgiving repayment options. Student loans typically have deferments and forbearances in the event of a hardship. Pausing payments is far from ideal, but a payment pause may help some borrowers. Additionally, federal student loans have options like income-driven repayment and student loan forgiveness. Credit cards don’t have these perks.

Important Exception: Student loans are worse than credit cards in bankruptcy. Credit cards are treated like most other debts, while student loans require special steps that make them more difficult to discharge. If bankruptcy is on the horizon for you, the student debt may be worse.

The Advantage of Paying Credit Card Debt First

Knocking out high-interest debt first can save a ton of money. Knocking out credit card debt first also provides a unique advantage.

Paying down credit card debt provides immediate help to your debt-to-income ratio or DTI. The DTI is how creditors compare your income to the debt you carry. If your income makes it a struggle to keep up with your debt, getting approved for credit is challenging. If you want to buy a house, the DTI is the driving factor for how big of a mortgage you can get. Your DTI is as important — or more important — than your credit score.

Most people don’t realize that DTI compares monthly debt to monthly income. As your monthly bills get lowered, your DTI improves.

With student loans, if you pay off half your balance, the minimum monthly payment stays the same. Knocking out student loan debt only helps your DTI when a loan is eliminated.

Minimum payments for credit cards are calculated based on your balance. As you pay down your credit card balance, the minimum payment drops. This means that your DTI improves every month you make progress.

If you want to buy a house soon, a slightly improved DTI may make a huge difference. Improving your DTI may also help if you’re going to refinance your existing debt.

When is Student Loan Debt Worse?

As noted earlier, a reasonable interest rate on a credit card is often considered an alarming interest rate on a student loan.

However, some credit cards come with introductory interest rates of 0%. The problem with these intro, or teaser, rates is that they don’t last long. A 0% interest rate becomes 22.99% fast. Most intro rates last for six to 18 months.

If it will take only three months to pay off your credit card, but you have a year at 0%, it means you can focus on student loans for the next nine months. The key is taking advantage of the low intro rate without getting hit with huge interest charges once the intro period is over.

Refinancing Credit Cards vs. Refinancing Student Loans

Debt refinancing provides an option to lower your interest rates, depending upon your credit score and DTI.

Student loans can be refinanced by working with a refinance lender. The refi pays off some or all of the borrower’s student loans and creates a new loan. For credit cards, consumers refinance by taking out a personal loan and using it to pay off existing credit card debt. In both circumstances, consumers find a lender willing to offer lower rates and save money in repayment.

Generally speaking, student loan refinancing offers lower interest rates than credit card refinancing. For example, lender SoFi currently offers a student loan refinance product and a personal loan to pay off credit cards. The personal loan comes with an interest rate of 5.99% to 18.85%, and borrowers have three to seven years to repay the debt. SoFi’s student loan refinance has rates of 2.25% to 6.94%, and borrowers have between five and 20 years to repay the loan.

Thus, refinancing is an option for both credit cards and student loans. However, the refinance option doesn’t shift the balance between which is worse because the student loan refinance options are better than credit card refinance options.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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