It’s common to have more than one kind of debt. This is especially true when you start your first job after college. You might also have a credit card, auto loan and mortgage payment due once you purchase your first house. Other random debts, such as student loans, are also very common.
You’ll likely have to pay back your loans after graduation if you are like most students who borrowed money during college. According to a recent College Ave. Student Loans study, 82% students who took out loans are expecting to make payments after graduation.
You’ll also want to balance your debt repayment goals with your saving goals.
It’s important to pay down your debts according to the best order. This will allow you to save as much money on interest while still achieving your goals. What debts should be paid off first? How to achieve the best results
1. Pay off Debts with High Interest Rates
Credit card debt is the most important debt, no matter what type you have. Why? Credit card debt is the most expensive debt that you may have.
Federal Reserve data indicates that the average interest rate charged by credit cards on accounts assessed interest was around 22 percent as of May 20, 2023. However, your credit card may charge rates higher than this average.
You can save money by paying as much as possible on your high-interest credit cards each month. With a balance transfer credit or a debt consolidation credit card with 0% APR, you can pay off your credit card debt more quickly.
2. Other Unsecured Debts
In the order of debt repayment, other unsecured debts such as personal loans should be paid next. After all, secured debts such as auto loans have lower interest rates. Federal Reserve reported in May 2023 that the average interest rates on a 24 month personal loan were 11.48%, compared with 7.81% for a 60 month auto loan.
You should pay the minimum on all of your bills during the entire process.
3. Next Step: Student Loans
Your student loans are the next debt that you should tackle. These loans are the next debts you should tackle, as they have low fixed rates of interest and payments that won’t change over time. You may want to consider income driven repayment plans if you have federal student loan debt.
You can refinance your student loan if you want to reduce the repayment period, lower your monthly payment or both. Refinancing federal loans may mean that you lose access to federal protections such as deferment or forbearance, and repayment plans based on your income.
4. The Remaining Debt
After you’ve paid off all of your debts or have substantially paid them down, you can concentrate your efforts on secured loans like auto loans and mortgages. Since they are secured by collateral, these debts tend to have lower interest rates. You can pay more than the minimum amount on your car loan or mortgage until you have paid them off.
You may also want to pay down debts that have extremely low rates of interest as slowly as you can to increase your cash flow to invest and cover living expenses. For example, if you had a 30-year fixed-rate mortgage when the average interest rate was 2.65% in January 2021, it would make sense to pay the minimum amount and invest the extra money.
Additional Financial Considerations
You should balance your debt repayments with other financial concerns. Focusing too much on repayment of debt early in life may leave you behind with regards to saving for retirement and a first house.
Even if you need to temporarily stop investing and saving, you can still pay off student loans and secured debts while investing and saving for the future.
Lastly, ensure that you have sufficient emergency savings during your entire debt repayment journey or start saving as soon as possible. You may end up using credit cards or other loans in order to make ends meet if you don’t have a fully-funded emergency fund. This can ruin your progress on debt repayment.
How much money should you put aside? Although most experts suggest having an emergency fund to cover three to six month’s worth of expenses, you can start small.
Expert Tips
Save a few hundred bucks per month, until you reach a savings of a few thousand dollars. Then work to accumulate at least three full months’ worth of expenses.
Final Thoughts
Most people have more than one kind of debt, especially if they are young and at the beginning of their career. You’ll need a plan to pay it off. This will help you to reduce the interest and reach your goals.
It is always a good idea to focus on your credit card debt first, as these are the debts that don’t have an asset attached and usually come with higher interest rates. Next, you can concentrate on your student loans. Then you can move onto other secured debts like a car or home loan.
In the interim, ensure you have a sufficient emergency fund. Invest in it to prepare for retirement. If you are serious about repaying your debt, it won’t be forever. Saving and investing early will help you to benefit from compound interest, and you can avoid using credit cards as a result of unexpected expenses. The best way to keep track of these factors is by creating a budget.
Use this Budget Worksheet to guide you if you don’t have a budget or aren’t sure where to begin. You’ll be on your way to financial freedom in no-time.
“Debt battle: credit cards or student loans first?
It’s common to have more than one kind of debt. This is especially true when you start your first job after college. You might also have a credit card, auto loan and mortgage payment due once you purchase your first house. Other random debts, such as student loans, are also very common.
You’ll likely have to pay back your loans after graduation if you are like most students who borrowed money during college. According to a recent College Ave. Student Loans study, 82% students who took out loans are expecting to make payments after graduation.
You’ll also want to balance your debt repayment goals with your saving goals.
It’s important to pay down your debts according to the best order. This will allow you to save as much money on interest while still achieving your goals. What debts should be paid off first? How to achieve the best results
1. Pay off Debts with High Interest Rates
Credit card debt is the most important debt, no matter what type you have. Why? Credit card debt is the most expensive debt that you may have.
Federal Reserve data indicates that the average interest rate charged by credit cards on accounts assessed interest was around 22 percent as of May 20, 2023. However, your credit card may charge rates higher than this average.
You can save money by paying as much as possible on your high-interest credit cards each month. With a balance transfer credit or a debt consolidation credit card with 0% APR, you can pay off your credit card debt more quickly.
2. Other Unsecured Debts
In the order of debt repayment, other unsecured debts such as personal loans should be paid next. After all, secured debts such as auto loans have lower interest rates. Federal Reserve reported in May 2023 that the average interest rates on a 24 month personal loan were 11.48%, compared with 7.81% for a 60 month auto loan.
You should pay the minimum on all of your bills during the entire process.
3. Next Step: Student Loans
Your student loans are the next debt that you should tackle. These loans are the next debts you should tackle, as they have low fixed rates of interest and payments that won’t change over time. You may want to consider income driven repayment plans if you have federal student loan debt.
You can refinance your student loan if you want to reduce the repayment period, lower your monthly payment or both. Refinancing federal loans may mean that you lose access to federal protections such as deferment or forbearance, and repayment plans based on your income.
4. The Remaining Debt
After you’ve paid off all of your debts or have substantially paid them down, you can concentrate your efforts on secured loans like auto loans and mortgages. Since they are secured by collateral, these debts tend to have lower interest rates. You can pay more than the minimum amount on your car loan or mortgage until you have paid them off.
You may also want to pay down debts that have extremely low rates of interest as slowly as you can to increase your cash flow to invest and cover living expenses. For example, if you had a 30-year fixed-rate mortgage when the average interest rate was 2.65% in January 2021, it would make sense to pay the minimum amount and invest the extra money.
Additional Financial Considerations
You should balance your debt repayments with other financial concerns. Focusing too much on repayment of debt early in life may leave you behind with regards to saving for retirement and a first house.
Even if you need to temporarily stop investing and saving, you can still pay off student loans and secured debts while investing and saving for the future.
Lastly, ensure that you have sufficient emergency savings during your entire debt repayment journey or start saving as soon as possible. You may end up using credit cards or other loans in order to make ends meet if you don’t have a fully-funded emergency fund. This can ruin your progress on debt repayment.
How much money should you put aside? Although most experts suggest having an emergency fund to cover three to six month’s worth of expenses, you can start small.
Expert Tips
Save a few hundred bucks per month, until you reach a savings of a few thousand dollars. Then work to accumulate at least three full months’ worth of expenses.
Final Thoughts
Most people have more than one kind of debt, especially if they are young and at the beginning of their career. You’ll need a plan to pay it off. This will help you to reduce the interest and reach your goals.
It is always a good idea to focus on your credit card debt first, as these are the debts that don’t have an asset attached and usually come with higher interest rates. Next, you can concentrate on your student loans. Then you can move onto other secured debts like a car or home loan.
In the interim, ensure you have a sufficient emergency fund. Invest in it to prepare for retirement. If you are serious about repaying your debt, it won’t be forever. Saving and investing early will help you to benefit from compound interest, and you can avoid using credit cards as a result of unexpected expenses. The best way to keep track of these factors is by creating a budget.
Use this Budget Worksheet to guide you if you don’t have a budget or aren’t sure where to begin. You’ll be on your way to financial freedom in no-time.
Three Citations of Research Articles
https://www.federalreserve.gov/releases/g19/current/
https://fred.stlouisfed.org/series/MORTGAGE30US
https://studentaid.gov/manage-loans/repayment/plans/income-driven
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