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Should you pay off a personal loan or credit card first?
Having a large amount of debt can be stressful, let alone multiple debts at once. If you have both a credit card debt and a personal loan, you may be wondering which one you should aim to pay off first.
Both a personal loan and a credit card will have different interest rates and payment cycles. But both are debts and must be repaid to reduce your interest costs and help your budget get much-needed breathing room. So, which do you pay off first?
Generally, credit card debt is more expensive than personal loans and repaying it first can help reduce the total interest outflows. Additionally, regularly paying your credit card dues helps improve your credit score as it reduces the credit utilisation limit. A higher credit score and strong repayment history may help you access better terms for other loans in the future.
Even when you are repaying the credit card debt before the personal loan, you must ensure you pay the minimum dues on other loans to ensure your credit score is not negatively impacted. See if you can consolidate multiple credit cards into one, so you have to monitor and pay only one interest payment instead of several.
While paying the more expensive loan is beneficial, you need to determine your financial situation and check how much you can afford to make your decision. Consult an experienced advisor for more guidance and seek the best option based on your situation.
Key factors when choosing which debt to pay first
Interest rates
First and foremost, most experts recommend that you pay off the debt with the highest interest rate first. Generally speaking, the interest rate for credit cards is usually higher than for personal loans. Even if your personal loan debt is larger, if your credit card purchase rate is much higher than your loan rate, it’s likely to snowball out of control faster.
Fees and charges
Both credit card and personal loans typically come with ongoing charges over and above the interest. Some credit card fees include annual fees, late payment and cash advance charges, and international transaction fees. Additional personal loan fees include establishment charges, early repayment penalties, ongoing monthly fees, and late payment charges.
Adding the interest cost and other charges to calculate the comparison rate can help you make an informed decision. For example, if your credit card annual fee is almost as much as your personal loan repayments, it could make sense to pay this debt off first so you can close the account and balance your budget.
Strategies to paying off multiple debts at once
If you’re still not sure how to approach this, it’s worth considering some popular strategies for repaying multiple debts. There are two methods you can adopt to repay your loans, which are:
Snowball repayment
The first step is to list down all your loans, starting from the biggest to the lowest outstanding amount. In this strategy you would focus on repaying the smallest loan first, meanwhile you would make minimum repayments on the largest loans as you chip away at the smaller debts.
The primary objective is to repay the smallest debts as quickly as possible with any extra cash available in your budget. Once they are fully repaid, you could focus on closing the next smallest loan and continue this cycle until all your debt has been paid off.
Avalanche repayment
In this method, you list down your loans from the most expensive to the least expensive. You then pay the minimum dues on the least costly loan and increase the instalments on the most expensive loans. This method allows you to reduce the total interest costs, resulting in significant savings over the long term.
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