Ask Money

Credit cards vs student loans

Chris Farrell May 14, 2010

Question: I was recently able to lock my existing credit card debt in at 1.99% or less for the next 6 months, which is lower than the roughly 3.5% interest my student loans were consolidated at. My mother and I are having a debate about which place is the better place to use the funds that remain after I pay living expenses (including any new charges which are on a different card plus) and put some money into my savings. I say for the next 6 months I should put any extra money towards my student loans which are temporarily at a higher interest rate and which are absolutely about 20x greater than my credit card debt. She says since credit debt is worse debt I should still continue to put extra money towards paying off my credit debt. What do you think? Heather, Milwaukee, WI

Answer: Well, this is one of those times when Mom is right: Get rid of the credit card debt. (I bet you love hearing that!)

What’s more, I would focus on not putting any new charges on your other credit card unless you can pay off the balance in full every month. That’s a really important financial goal to strive for. A simple rule of thumb is that credit card debt is expensive debt even if the interest rate is temporarily low. Fact is, the interest rate on credit card debt never stays down for long. I would take advantage of your rate break to eliminate the debt.

Yes, your student loan debt is bigger and carries a higher interest rate. But student loan debt also has a number of built in safeguards against default if you should run into financial difficulties. You can always get far more aggressive about paying off your student loans after you’re credit-card-debt-free and, hopefully, if your financial circumstances improve along with the economy.

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