When people are struggling with debt, it is likely that they are dealing with one of two types: credit card debt or student loans. In many cases, people are suffering from both, but do not know which one to pay off first. So, if you have student loan debt and credit card debt hanging over your head, which one should you prioritize? Below are a few factors that will help you decide.
The Consequences of Non-Payment
Student loans and credit cards are both unsecured debts. That means that you do not have to put up any type of collateral to take out the debt and that no one is going to come and take your car or your home if you do not pay them off. The only exception to this is if your student loans are federally-held loans. If the student loan that you took out is a federal loan, the federal government can withhold your tax refunds to repay them.
However, even if your student loans are not federal loans, your credit score will still suffer. This holds true whether your student loans are federal or not. When you default on any loan, the credit reporting bureaus, such as Equifax and TransUnion, will lower your credit score as a result. If the non-payment continues on for several months, the student loan lender or the credit card company may even pursue a lawsuit against you. If they are successful, this could result in a court issuing a wage garnishment against you, or a bank levy. In either case, your credit and your finances will suffer.
There are many consequences that come with not repaying student loans and credit cards, so this is not often enough of a factor for many people to decide which debt to pay off first.
Ability to Discharge the Debt
The ability to discharge debt is one of the biggest differences between student loans and credit card debt. If you have amassed significant credit card debt that you feel you cannot repay, you can file for Chapter 7 bankruptcy fairly easily. This will discharge all of your credit card debt. Discharging student loans through bankruptcy is much more difficult and, in many cases, not even possible.
To discharge student loans through bankruptcy, you must show that repaying the debt would cause you to live below the minimum standard of living. You must also prove that you are unable to make payments for a long period of time, and that you have tried to arrange a repayment schedule with your lender, but that the attempt was unsuccessful.
There are some programs that will forgive either a portion of your debt, or all of it. With a credit card, there are no programs that will forgive your debt, except for bankruptcy, which discharges it. Without filing for bankruptcy, the best chance of having credit card debt is to have the credit card company cancel a portion of it through negotiations. These are difficult, though, and not always successful.
Due to the fact that it is fairly easy to erase credit card debt through bankruptcy, many people choose to repay their student loans first, as there are fewer options for discharging this debt.
Flexibility of Repayment
While you are repaying your student loans, you will have a great deal of flexibility with your repayment plan. Typically, you will be able to choose from many different repayment plans. Many lenders even offer a repayment schedule based on your income and your monthly expenses.
With a credit card, on the other hand, you will have a low minimum payment you must make each month, and there is little flexibility with that amount. If you do not make at least this payment, neither your credit card account nor your credit score will be in good standing. If you cannot afford even the minimum payment, you will not have many options.
A few credit card companies will offer to lower your interest rate and, as such, your monthly payment, but this is rare. To be eligible, you typically must have also already missed some payments, which means your credit score has already taken a hit. However, this inflexibility of credit card repayment options may mean it is better to pay off credit card debt first.
Student loans and credit cards are both loans, which means they will both have an interest rate attached to them. However, the interest rate for credit cards is much higher. It is not unusual for credit cards to have interest rates of 19 or 20 percent. Student loans usually have interest rates that hover around six or seven percent. Due to the fact that credit cards will cost you much more, it is sometimes wiser to get rid of this debt first.
Lenders’ Perception of the Debt
When lenders are determining whether or not to give you credit or a loan, they will not only look at the amount of debt you have but also what type of debt. Lenders do not view consumer debt, or credit cards, very kindly. However, student debt is considered ‘good debt’ because it is an investment in yourself and your future. It also shows that you are trying to better yourself to secure a good job that will allow you to pay off that debt. As such, it is sometimes better to get rid of credit card debt first, so your good debt still shows on your credit report, but your bad report does not.
Our Florida Debt Defense Lawyers Can Help You Explore Your Options
Drowning in any type of debt causes a great amount of stress and anxiety. If you are struggling and do not know how you are going to repay your debt, or if a debt collector has already taken legal action, call our Fort Lauderdale debt defense lawyers today. At Loan Lawyers, we will help you explore your options, determine which debt you can possibly discharge, and defend you against a lawsuit if one has been filed against you. Call us today at (954) 523-HELP (4357) to schedule your free consultation.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation and find out more about our money-back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.